THE BASICS #6: STOCK EXCHANGE
Thanks to the Private vs Public video, we know that public companies sell their equity shares (stock) on a stock exchange. But what is a stock exchange, exactly?
By definition, a stock exchange is a marketplace for people to buy and sell stocks. It’s the physical location where buyers and sellers can find each other and make a deal.
In this video, I used a bake sale to explain the role a stock exchange plays in the stock market. I could have also used a flea market or a farmers’ market. In any case, the two main takeaways are:
- A stock exchange is an ACTUAL MARKETPLACE. If you want to buy shares of a certain company, someone else must not only own those shares, but also be willing to sell them to you for the price that you want to pay. And vice versa.
- A stock exchange has operating hours just like a bake sale/flea/farmers’ market. When it’s open, you can buy and sell stock. When it’s closed, you can’t! Simple enough, right?
- The Nasdaq and the NYSE’s open market hours are Monday through Friday, 9:30am to 4:00pm EST. Therefore, as an individual investor, you cannot buy/sell shares of US-based companies in the middle of the night, on weekends, or on federal holidays.
So how does a transaction occur? In the video, I said the buyer and seller have to haggle and agree on a price. You may have noticed that I wrote the “buyer’s bid” and the “seller’s ask”. These are very common stock market terms and are used in place of “offer” and “counteroffer”. The bid-ask can tell you a lot about a stock, but we’ll stick to just a basic explanation for now.
For example, let’s assume I have stock that you want to buy. You bid, or offer me, $15.00 per share for my stock. But I’m asking $15.10 per share. The $0.10 difference between your bid and my ask is called the bid-ask spread. In order for us to make a deal, you’d either have to come up to $15.10, I’d have to go down to $15.00, or we’d meet somewhere in the middle.
Lastly, I want to quickly point out some important differences between the Nasdaq and the NYSE. As mentioned in the video, it’s not really necessary to know which exchange a certain stock trades on. However, I think the differences are interesting, so I’ll share them with you now.
The three main differentiating factors are:
- Execution: How sales are actually processed.
- The NYSE operates as an auction market - buyers bid and sellers ask, and a “specialist” pairs up matching bids and asks.
- The Nasdaq, on the other hand, operates as a dealer’s market, or a market maker. The dealer uses its own money to buy and sell stocks to make sure there’s always a seller or buyer for investors to match with. This provides liquidity, which is just a fancy term for how quickly and easily stocks can be bought and sold. The more liquid, the faster and more easily a stock can be bought and sold. The less liquid, the harder it is to find a match and make a deal.
- Requirements: Companies have to meet certain revenue minimums, be at least a certain size, have a stock price of at least $4… The list goes on and on. The biggest difference between the Nasdaq and NYSE is the fee a company must pay to list, or sell their equity, on that particular exchange. Nasdaq’s entry and yearly listing fees are significantly cheaper than NYSE’s.
- Perception: How the public views the exchange.
- The Nasdaq is perceived to be the more techy, growth-oriented exchange. Companies like Facebook, Twitter, Apple, and Netflix have all listed their shares on the Nasdaq.
- The NYSE is considered home to more “established” companies. These are often staples of America’s economy and history, such as Bank of America, General Electric, Ford, and Exxon Mobil.
- This difference may be, in part, due to Nasdaq’s more affordable fees.
Still curious? You can easily check which exchange a certain stock trades on by typing “‘company name’ stock” into Google. The exchange that particular company is listed on will be displayed directly under the company’s name. Here are two examples for reference!
(Don't worry - I'll explain what the rest of those charts mean in the near future!)