How the NYSE and NASDAQ are Different, Why That Matters to Investors
The New York Stock Exchange and the NASDAQ are two of the most frequently referenced stock exchanges in the United States.
The New York Stock Exchange and the NASDAQ are two of the most frequently referenced stock exchanges in the United States. Because many of the companies that list their stock on these exchanges do business in multiple countries, the NYSE and NASDAQ are barometers of the global economy as well. Although most retail investors don't pay attention to the differences between the two exchanges, the trading style and regulations of the exchanges create a difference in the type of companies that are found on the exchanges. Those differences can also change the expectations of investors.
Know What Stocks You're Buying, NASDAQ or NYSE
My first introduction to the stock market as a kid did not include the difference between NASDAQ and NYSE-listed stocks and I didn't know there was a difference. But as I started to write about investing, my curiosity got the better of me. There had to be a reason why there were different exchanges and I wanted to know what.
While most of the differences are not particularly significant to investors, there are some that might inform your investing decisions. More importantly, there are key differences between the two exchanges that could determine which exchange a company will choose to list its shares.
What are the New York Stock Exchange and the NASDAQ?
The New York Stock Exchange (NYSE) and the NASDAQ are two of the largest stock exchanges in the world. They are both located in New York although the stocks that are on them can be traded around the world.
The NYSE has been in existence since the earliest days of the United States. It was founded in 1792. The NASDAQ, by contrast, is a relatively new exchange. It has only been in existence since 1971. That fact, in itself, provides a clue into one of the key distinctions between the exchanges. The NYSE is made up of mostly blue-chip companies that have large market capitalizations while most of the NASDAQ stocks are newer companies.
The NYSE and NASDAQ offer growth investors a clue as to how much risk the market is willing to absorb at a given moment. For example, when you hear that the Dow is up (which usually means the NYSE is up), it typically signals a time where investors may be less inclined to take risks. But when the NASDAQ is up and the Dow is down or trailing, it usually signifies that investors are more confident about the overall economy and are willing to assume more risk.
This Is A Brief History Of The NYSE
For an institution that is vitally important as the financial center for American companies, the New York Stock Exchange had the most humble of beginnings. On May 17, 1792, 24 stockbrokers signed what was known as the Buttonwood Agreement on Wall Street. The reason the agreement has that name was that it was signed beneath a Buttonwood tree.
The agreement formed a centralized exchange for the growing securities market in the newly formed nation. The agreement removed the need for auctioneers, who were frequently used to trade commodities such as wheat and tobacco, and set a commission rate. At first, the newly formed exchange focused on government bonds.
It would be 25 years later, in 1817, when the exchange changed its name to the New York Stock & Exchange Board which later became the New York Stock Exchange. This is also when the exchange expanded beyond government bonds and bank stocks to become the financial center of the United States. The exchange moved to its present, iconic, location at 11 Wall Street in 1865.
A Brief History Of The NASDAQ Exchange
The NASDAQ (which stands for the National Association of Securities Dealers Automated Quotations) was created to give mid and small-cap stocks an opportunity to raise capital. At first, the NASDAQ provided stock quotes and matched buyers and sellers with dealers.
However, as it gained popularity, speculative over-the-counter (OTC) stocks began to list on the exchange. It also began to draw the attention of technology stocks. Some of the most well-known technology stocks including all of the FAANG stocks (Facebook, Amazon, Netflix, and Alphabet/Google) trade on the NASDAQ exchange. During the dot-com boom of the late 1990s, many start-up companies (what today would be called unicorn stocks) were listed on the NASDAQ.
The NYSE and NASDAQ Are Different Beasts
The NYSE conducts trades in an auction style. Brokers purchase stocks on behalf of their clients or firms. Trades take place between two individuals on the floor of the exchange. Every order features a broker who will either call a floor broker or enter the order electronically and a specialist who serves as the market maker for that stock. The specialist posts bid and ask prices and manages the actual execution of the trades.
The NYSE is the stock exchange that is characterized by old movies. Traders running across the floor with written buy and sell orders looking to broker a deal on behalf of a firm or client. In fact, the NYSE is the origin of the "ticker tape" parade where filled orders were thrown out of office windows to fete the honorees of the parade.
The NASDAQ, on the other hand, is an electronic exchange. There is no physical interaction required for trading. All transactions are processed electronically. Because of this, buyers and sellers are matched in fractions of a second. Unlike the NYSE, each security on the NASDAQ has multiple Market Makers to help ensure liquidity. Apple, for example, has 54 registered Market Makers. Because all the transactions are electronic, the NASDAQ has a longer trading day allowing active trading for several additional hours each day.
With the advent of more sophisticated trading technology, the difference in trading structures between the two exchanges has become more subtle. For example, the NASDAQ now automatically matches buyers and sellers similar to an auction system. Conversely, the NYSE relies heavily on computers to facilitate their trades. However, only the NYSE retains the presence of human "brokers" who man the trading floor.
Listing Requirement For The NYSE?
The NYSE includes approximately 2,400 companies with a market capitalization of over $26 trillion. The NYSE has stricter guidelines governing the types of companies that can list on the exchange. Once a company is trading on the NYSE, it can be de-listed if they fail to meet these requirements. Here are the major requirements that all companies must meet:
- The company must have at least 2,200 shareholders
- The company must trade over 100,000 shares per month
- The company must have a market valuation of over $100 million
- The company must generate more than $75 million in annual revenue
Listing Requirement For The NASDAQ?
The NASDAQ has over 3,800 listings with a total market capitalization of $11 trillion dollars. To understand the listing requirements for the NASDAQ, it's important to understand that the NASDAQ is a company as well as an exchange. This means that every company that wants to be listed on the exchange has to pay an initial listing fee in addition to an annual fee. Both fees are set based on the size of the company.
- The listing fee is between $5,000 and $75,000
- The annual fee is between $42,000 and $155,000
In addition to paying dues, the companies must meet additional requirements that include:
- Providing quantitative financial documents (earnings, market cap, and assets)
- Provide detail about their corporate governance standards that give a clear guidance about issues such as shareholder rights and annual meetings.
Like the NYSE, once companies are listed they have to continue to meet the regulatory requirements including making financial information about the company and the stock available to the public. The companies must also meet SEC requirements. All of this is to done to ensure transparency to investors.
What Exchange Are The Dow Stocks Listed On?
The Dow Jones (also known as "The Dow") is an index of the 30 biggest companies in terms of scale and firm returns. When stock reports refer to "The Dow was up X number of points" or "The Dow was down X number of points" they are referring to the average of these 30 stocks. It is considered to be a broad view of the market in general. The companies in the Dow 30 make up the Dow Jones Industrial Average (DJIA). An individual stock may be listed on either the NYSE or the NASDAQ (but not both).
Listing On The NYSE Or NASDAQ, What's The Difference?
Generally speaking, if a company can meet the requirements for the NYSE it is advantageous for them to hold an initial public offering (IPO) on the NYSE. This is because companies that list on the NYSE are able to generate more funds when holding their IPO on that exchange.
However, because those requirements are too stringent for many companies to meet, the NASDAQ is a viable alternative. This is why many of today's "unicorn" stocks hold their IPOs on the NASDAQ. To further illustrate this, there were 34 initial public offerings (IPOs) posted on the NYSE in 2016. This was just three percent of the total volume of IPOs worldwide. By contrast, in that same year, the NASDAQ held 77 IPOs which was seven percent of global IPOs, more than double that of the NYSE.
What Exchange Listing Means To Investors
The NYSE is composed of some of the country's most venerable companies. These companies have large market capitalizations and, for the most part, are in a mature phase of their business. But with their size comes somewhat limited growth opportunities. After all, most investors are not expecting robust growth from blue-chip stocks. They are looking for stability and, possibly, a dividend.
The NASDAQ, by contrast, is generally populated by companies that are younger and in a growth phase. For this reason, companies that are listed on the NASDAQ have historically generated slightly higher returns. But those returns come with added risk.
The Last Word About The NYSE and the NASDAQ
The New York Stock Exchange and the NASDAQ are two of the most widely known stock exchanges in the world. When the NASDAQ first opened in the 1970s, it was a very different experience that gave start-up companies an innovative alternative to the more stringent NYSE. In fact, today the NASDAQ is the largest electronic stock market with over 3,000 companies listed. And although the NYSE is typically defined by companies with market capitalizations, the five largest companies in terms of market cap are listed on the NASDAQ.
Although the requirements for the NYSE still limit the number of companies that can join, the emergence of electronic trading has made the mechanics of buying and selling between the two exchanges very similar.
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