The images on TV do little to clarify. One look at the stock exchange floor in New York and you get the sense that the whole thing is very loosely organized chaos. I’m going to attempt to drop some knowledge and bring some order back into the equation.
The first thing to understand is that there are really two major stock exchanges, the New York Stock Exchange (NYSE) and the NASDAQ (National Association of Securities Dealers Automated Quotations). Both operate as publicly traded companies. What’s the difference?
Many of us share a common perception of the stock market. We imagine traders running around like chickens with their heads cut off, shouting and trying to place orders for clients who are hours away on the phone.
This picture of anarchy and dysfunction comes from the NYSE, which does its trading (at least in part) on a physical floor in a building on Wall Street in New York City.
Although the NASDAQ lists its corporate headquarters on Broadway in New York, there’s no physical market there. All the trading that takes place is handled electronically.
This is a bit of an oversimplification and most of what the NYSE does is handled electronically at this point as well. In fact, a computer glitch recently caused the NYSE to be down for several hours.
The whole episode might sound like a nightmare, but you can turn this increasing reliance on computers into an advantage investing in the cyber security firms that exist to plug the holes.
Another significant difference between the two markets is the way trades are executed.
On the NYSE, trades are handled auction-style with the highest bids for individual stocks matched up with the lowest asking price. This is handled directly between buyers and sellers.
On the other hand, the NASDAQ is a dealer’s market. People buy and sell stocks through a dealer, also known as a “market maker.”
Upstart vs. Establishment
Stocks listed on the NYSE are considered more established than the stocks on the NASDAQ because they tend to have been around a long time.
Meanwhile, the NASDAQ is perceived to be the home of high tech. Among the companies listed on the exchange are Microsoft, Twitter and Facebook. Besides the tech angle, companies listed on the NASDAQ tend to be younger than their NYSE counterparts.
The Big Three
You may notice that at the end of each trading day the media doesn’t report on how the NYSE performed. Commentators love to look at the Dow, the S&P 500 and the NASDAQ because major companies representing a wide spectrum of industries are on these lists. They are often key indicators for the performance of the economy as a whole.
The Dow Jones Industrial Average (commonly referred to as the Dow) is often the first index referenced when analysts talk about the day’s stock results.
What many people don’t realize is that the Dow is comprised of the stock performance of just 30 big-name companies listed on either the NYSE or NASDAQ. Each of these companies represent the true heavy hitters in their individual industries. Apple, Coca-Cola, Disney and McDonald’s are just a few names on the list.
The idea is that the performance of the most popular brands is a key signal for the health of the overall market.
Because it’s been around so long, you can get a good indication of historical market trends by looking at the Dow. Although the market has its ups and downs, over time, the market has generally followed an upward trajectory. If you leave your money in the market, you’ll see a bigger gain over time than if you just left it in the bank.
Another key market indicator is the S&P 500 (Standard & Poors). Stocks included on this index are selected for their market cap, industry and liquidity (how easy it is to buy or sell the stock). The S&P 500 is an index of companies that have a large market capitalization in excess of $5.3 billion. Market capitalization is calculated by multiplying the share price by the number of outstanding shares.
The S&P 500 is considered by some to be a better indicator of market performance than the Dow because it includes a broader range of companies. The S&P is also considered a weighted index: each stock’s weight in determining the overall index performance is based on its market value.
Stocks for this index are selected from both the NYSE and NASDAQ.
As mentioned above, the NASDAQ is a stock exchange. Unlike the NYSE, the closing numbers for the full NASDAQ are reported on daily and viewed as a market indicator.
One of the cool things about the NASDAQ is that the numbers are broken out by industry group when they’re reported on so that you can see which types of stocks are performing well on any given day.
That covers stock market exchanges and indexes. Do you have anything you’d like to learn about investing? Let us know in the comments.
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