Finance: The Nasdaq Explained

A brief overview of the NASDAQ.

The NASDAQ is the world's largest electronic stock market. The name was originally an acronym for National Association of Securities Dealers Automated Quotations. However, the market outgrew its origins as a quotation system, and now NASDAQ is a proper noun in its own right, no longer considered to be an acronym signifying something else.

The NASDAQ was created in 1971 to provide a market for over the counter (OTC) stocks, which were stocks that were not traded on the regular stock exchanges like the New York Stock Exchange (NYSE). Today, the NASDAQ and the NYSE together handle most of the securities trading in the United States.

Although the NASDAQ is an OTC market, it should not be confused with the OTC Bulletin Board, which lists stocks that are not eligible to be listed on NASDAQ.

Stocks listed on the NYSE tend to belong to larger, older, and more established companies, the most stable of which are known as the blue chips, while stocks listed on the NASDAQ often belong to smaller, newer, and more volatile companies. Many are technology and other quickly-growing companies. Much of the excitement during the stock market bubble of the late 1990's focused on volatile technology and internet stocks that were listed on the NASDAQ.

In 1998, the NASDAQ and the American Stock Exchange (Amex) merged in order to be able to better compete with the NYSE. The combined market is known as the NASDAQ-Amex.

The ticker symbols of NASDAQ stocks contain four letters, while ticker symbols of NYSE stocks contain fewer than four letters. This provides an easy way to tell at a glance which exchange a stock is listed on. An example of a ticker symbol on the NASDAQ is MSFT, which is the ticker symbol for Microsoft. Examples of NYSE ticker symbols are C, the symbol for Citigroup; GE, the symbol for General Electric; and TXN, the symbol for Texas Instruments.

Stocks on the NYSE are traded by people who are physically present on the stock exchange floor, while stock trades on the NASDAQ are handled electronically. The NYSE is an auction market, where people buy and sell from each other, with the highest offers to buy being matched with the lowest offers to sell. The NASDAQ works differently. It is a dealer's market. Instead of people buying and selling directly from and to each other, they conduct transactions with a third party dealer, known as a market maker. Using market makers rather than auctions speeds up transactions.

The market makers are brokerage firms that commit to being ready to buy and sell at least 100 shares of particular stocks on a regular and continuous basis. Market makers compete against each other to post the best prices, and the prices they offer are listed as NASDAQ Level II quotes which are available, in real time, to subscribers. Many market makers pay brokers to send orders their way. The SEC requires brokers to disclose where they are routing their orders.

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