If you’re familiar with investing, then you’ve probably heard of major stock exchanges like the New York Stock Exchange or the NASDAQ. But what exactly is the difference between these two exchanges? Here we’ll give you an overview of the three major American stock exchanges, as well as their similarities and differences.
What Are Stock Exchanges?
Stock exchanges are sort of like a mixture between an auction house and a marketplace where investors can buy, sell, and trade stocks from different companies. Stocks are basically a fractional share of ownership in a company.
On one level, stock exchanges are a bit like a mall because they serve as a place where investors can purchase shares from a variety of different companies all in one place. On the other hand, they more resemble an auction because the price of any one company’s shares is always fluctuating.
How Do Stock Exchanges Work?
When a company wants to raise money, one of the ways they can go about it is by selling shares of their companies to investors in the form of stocks. To do so, they’d apply for a listing on a stock exchange, sort of like a company might ask a mall if they could rent space to sell their goods.
Most of the top stock exchanges have pretty strict requirements, but if the company makes the grade, they are eventually allowed to list their shares for sale on the exchange. At that point, investors begin buying and selling the shares among themselves. If an investor thinks a company will do well, they’re more likely to buy that company’s stock and hope the price of each share increases in value. When they are ready to sell, they can sell them to another investor on the exchange who wants to purchase them.
What Are the Main 3 Stock Exchanges in the US?
There are numerous stock exchanges around the world, but most U.S. companies can be found on one of the three major American stock exchanges. These include:
- New York Stock Exchange (NYSE)
- American Stock Exchange (AMEX)
- National Association of Securities Dealers (NASDAQ)
While each of these exchanges serves the same purpose and functions in a similar way, there are a few differences between them. Let’s break down each with a broad overview of what sets them apart.
New York Stock Exchange (NYSE)
The New York Stock Exchange, often referred to as the NYSE, is the oldest American stock exchange still in existence and was founded in 1792. It’s also the largest equities-based stock exchange in the world based on volume and the total value of all of its listed assets.
While a great deal of trading is now done electronically, the NYSE still has a strong physical trading floor as well where investors gather to buy and sell in person.
The NYSE is an auction market, where buyers can set a “bid” on a stock that represents the price they’re willing to pay for it. Sellers, on the other hand, set an “ask,” which is the price they’d be willing to accept to sell their stock. Generally, this process is carried out by brokers who represent the actual buyers and sellers. The highest bid price is paired with the lowest available ask of each stock to pair up buyers and sellers who then complete their transactions.
National Association of Securities Dealers (NASDAQ)
Unlike the NYSE, the National Association of Securities Dealers, or NASDAQ, exists completely online. The second-largest exchange in the world, it offers a place for investors to buy, sell, and trade stocks electronically.
It tends to be easier for newer companies to get listed on the NASDAQ due to less strict requirements and lower fees. Today you’ll still find a large number of major technology stocks, such as Apple and Google, on the NASDAQ because it was easier for them to get listed back before tech was all the rage.
NASDAQ offers investors the chance to invest in both officially listed and over-the-counter (OTC) stocks, even from companies that have little revenue.
American Stock Exchange (AMEX)/ NYSE American
The American Stock Exchange (AMEX) used to be the third-largest U.S. stock exchange until it was acquired by NYSE in 2008. Now known as the NYSE American, it’s become a sort of off-shoot of the NYSE that’s mostly dedicated to the trading of small-cap stocks.
Stocks are classified as small-cap when the total value of their shares is between $300 million and $2 billion. While they tend to be a bit riskier due to their volatility, small-cap stocks have traditionally outperformed large-cap stocks.
Why Are Stock Exchanges Useful?
Stock exchanges can be hugely beneficial for both investors and companies. By selling shares of their company on an exchange, a company can raise capital to invest in its own growth.
Without stock exchanges, investing in different companies would be incredibly difficult, if not impossible, for many individual investors. If not for a place where they could easily buy and sell shares, investors would be forced to buy stocks directly from different companies or try to find a shareholder who was willing to sell (or buy) their stocks.
How to Access the Stock Exchange
Today, the easiest way to access all the major stock exchanges is to sign up with an online broker. Some of the most popular online brokers today include:
- TD Ameritrade
- Charles Schwab
Once you set up and fund an account, you’ll be able to research, buy, and sell stocks on all the major exchanges. Alternatively, you can hire a professional brokerage firm that will invest your money for you in exchange for a fee.
How to Know Which Stock Exchange to Use?
Honestly, it doesn’t really matter a great deal. Stock listings commonly include which stock exchange they are listed on, but if they don’t then you can simply look over the company overview to find out. Overall, however, there’s generally no need to stick to stocks from one exchange or the other.
The only exception would be if you were only interested in buying a certain type of stock. For instance, maybe you were only interested in those that had met the stringent requirements of the NYSE. On the other hand, if you were feeling lucky and wanted to invest exclusively in OTC or small-cap stocks, your best bet would probably be NASDAQ or the NYSE American. Other than that, most investors don’t worry a great deal about which of the three exchanges a stock is currently listed on.