Stock exchanges play a critical role in the functioning of the global economy by providing a marketplace where securities such as stocks, bonds, and derivatives can be bought and sold. Two of the most famous stock exchanges in the world are the New York Stock Exchange (NYSE) and the NASDAQ. These exchanges serve as platforms for companies to raise capital, and for investors to buy and sell shares of publicly listed companies. Understanding how stock exchanges work, the difference between the NYSE and NASDAQ, and their roles in the broader financial system is essential for anyone interested in investing or understanding financial markets.
A stock exchange is a regulated marketplace where securities are bought and sold. It facilitates the process by which companies raise capital by issuing shares to the public and allows investors to trade those shares. The stock exchange ensures that transactions are conducted in an orderly, transparent, and legal manner, providing a level of trust between buyers and sellers. The price of stocks and other securities is determined by supply and demand in the marketplace, and this price fluctuates throughout the trading day based on investor sentiment and economic factors.
The stock exchange serves several key functions in the economy:
The New York Stock Exchange (NYSE) is one of the oldest and largest stock exchanges in the world, located in New York City. It has been in operation since 1792 and is home to many of the world’s most established companies. The NYSE is known for its physical trading floor, where brokers and traders execute buy and sell orders through face-to-face interaction.
The NYSE operates on a hybrid model, combining both electronic and traditional floor trading. The exchange uses an auction market system, where buyers and sellers submit their orders, and a designated market maker (DMM) helps match them. DMMs are responsible for maintaining liquidity in specific stocks and ensuring that prices remain fair. Here's how the NYSE works:
On the NYSE, large institutional investors or hedge funds may place large buy or sell orders for stocks like Apple or Tesla. These transactions are often handled by brokers who communicate with market makers to ensure the trade is executed at the best price. For example, if an institutional investor wants to sell 1 million shares of a company, the DMM for that stock will help facilitate the sale by matching the seller with buyers, either from the floor or through electronic systems.
The NASDAQ is another major stock exchange, but unlike the NYSE, it operates entirely electronically. Established in 1971, NASDAQ is known for its tech-heavy listings, including some of the world’s most innovative and high-growth companies, such as Apple, Amazon, Microsoft, and Google (Alphabet). The exchange operates without a physical trading floor, using an electronic network where buyers and sellers trade directly through automated systems.
NASDAQ operates as a dealer market rather than an auction market. In this system, market makers (dealers) compete to offer the best prices for stocks by buying and selling on behalf of investors. Here’s how it functions:
Companies like Tesla and Facebook are listed on NASDAQ. Investors looking to buy shares of Tesla can submit an order through a brokerage platform, which sends the order to NASDAQ’s electronic system. The system automatically matches the buyer’s order with a seller’s order based on price and availability. The trade is executed quickly without human intervention, ensuring that it’s efficient and cost-effective.
While both the NYSE and NASDAQ are major stock exchanges, there are key differences between the two. Here are some of the main distinctions:
Stock exchanges like the NYSE and NASDAQ play a vital role in the global economy. They provide companies with the opportunity to raise capital by offering shares to the public. For investors, these exchanges offer a transparent and regulated environment to buy and sell securities. The existence of efficient and well-regulated stock exchanges allows for the efficient allocation of capital, supports economic growth, and contributes to wealth creation.
Stock exchanges also promote economic development by providing businesses with access to capital for expansion. For example, companies like Google, Apple, and Amazon were able to raise capital through initial public offerings (IPOs) on the NASDAQ, enabling them to expand their operations and drive innovation. The successful listing of companies on stock exchanges creates opportunities for individual and institutional investors to participate in the growth of these companies, contributing to a dynamic economy.
In 2012, Facebook went public through an IPO on NASDAQ, raising $16 billion. The IPO allowed Facebook to expand its operations, invest in new technologies, and scale its platform globally. For investors, it provided an opportunity to purchase shares in one of the world’s most popular social media platforms. The Facebook IPO was a major event in the world of tech stocks and demonstrated the role of stock exchanges in facilitating the growth of innovative companies.
