To put it simply, a stock exchange is a platform where stocks are traded. In these regulated capital markets, investors buy and sell stock in publicly traded companies—which in turn, makes it possible for companies to raise capital from the public and fund their operations.
The Nasdaq exchange, owned and operated by Nasdaq, Inc., is no different. It’s the leading U.S. exchange for health care, consumer, and technology initial public offerings (IPOs), welcoming 60 IPOs in the first half of this year alone and raising close to $4 billion.
What is the Nasdaq exchange?
The Nasdaq is the first electronic stock exchange. It’s known, by most, as the premier exchange for buying and selling tech stocks. After all, Jeff Bezos, Steve Jobs, Mark Zuckerberg, and Elon Musk all offered shares of their companies on the Nasdaq before those companies became some of the world’s most widely known and used enterprises.
The exchange dates back to the 1970s; at the time, most of the companies that were listed on the Nasdaq were smaller, more forward-thinking, and tech-oriented companies—and that’s pretty much continued up to today, Tom Graff, the head of investments at Facet, says. Of course, more than just tech companies are listed on the exchange.
“That’s why today you think of it as being a little bit more tech-oriented,” Graff says, adding, “That’s kind of where it [started].”
The exchange shouldn’t be confused with the Nasdaq Composite, which is an index of the companies on the Nasdaq and a way of measuring the performance of all of Nasdaq’s stocks.
How the Nasdaq works
Because the Nasdaq is an electronic exchange, there is no physical trading floor, unlike the New York Stock Exchange, which has a physical trading floor even though most of its trades are done electronically in our post-pandemic world.
“There’s no sort of market maker room where people are yelling and screaming, it’s all electronic…so, in a sense, it functions very similarly to the New York Stock Exchange, but just works entirely electronically,” Graff says.
As for how the Nasdaq operates, it’s a dealers’ market. That means that brokers buy and sell stocks through the markets rather than among one another. Graff’s explanation was simple—let’s say you want to buy shares of Microsoft; a broker will send that order to the exchange to find a seller. The Nasdaq will then, electronically, match the highest sell price with the lowest buy price. If they’re both at $100, then we have a trade. To compare, the New York Stock Exchange is a prominent example of a broker’s market, where brokers auction off shares of stocks for their clients.
The Nasdaq market tiers and listing requirements
The Nasdaq stock market has three market tiers:
Nasdaq Global Select Market: The newest tier, which was previously part of the Nasdaq National Market, lists about 1,200 large-cap companies. Under the Nasdaq Global Select Market, companies must meet all of the criteria under at least one of the four financial standards: earnings, capitalization with cash flow, capitalization with revenue, or assets with equity. In terms of earnings, for example, companies need to have made at least $11 million in aggregate pre-tax earnings in the prior three fiscal years; at least $2.2 million in the two previous years; and no net losses in any of the three previous years.
Nasdaq Global Market: The Nasdaq Global Market tier was previously part of the Nasdaq National Market (Nasdaq-NM) for about 1,450 mid-cap stocks. Under the Nasdaq Global Market, companies must meet all of the criteria under at least one of the four standards. In terms of income, companies must have at least $1 million in income from continuing operations before taxes, $15 million in stockholder equity, and $16 million market value of unrestricted publicly held shares.
Nasdaq Capital Market: The Nasdaq Capital Market tier was formerly known as the Nasdaq SmallCap Market for small-cap companies. Under Nasdaq Capital Market, must meet all of the criteria under at least one of the three standards below. In terms of net income standard, companies must have $4 million in stockholder equity, $5 million of market values of unrestricted publicly held shares, and $750 million in in net income from continuing operations,
To be listed on any of the three market tiers, companies need to meet a number of financial, liquidity, and corporate governance requirements that vary based on the tier. The initial financial and liquidity requirements for the Nasdaq Global Select Market are more stringent than those for the Nasdaq Global Market. And, the initial listing requirements for the Nasdaq Global Market are more stringent than those for the Nasdaq Capital Market. However, corporate governance requirements are the same across all three market tiers. Companies can also move from one tier to another over time, depending on if/ how they’re meeting requirements.
How has the Nasdaq changed over time?
The Nasdaq used to be called the National Association of Securities Dealers Automated Quotations, when it was simply for providing information on stock prices (specifically, automated stock quotes) back in 1971 in New York City. It became the first online exchange, and now it’s the second largest exchange by market capitalization, after the New York Stock Exchange.
Over the years, some of the biggest companies in tech listed shares of their company on the exchange. For example, In 1971, Intel had its IPO on the Nasdaq, followed by Apple in 1980 and Microsoft in 1986.
In his own career, Graff says, the Nasdaq has evolved in terms of perception. Back in the late ’90s, there was a sense of prestige surrounding the New York Stock Exchange, one that still exists today. That being said, the Nasdaq was not necessarily seen as the exchange for larger, more mature companies. The same can’t be said today.
The takeaway
The Nasdaq stock exchange will always be known for being the first all-electronic stock exchange, inhabited by tech giants like Microsoft, Apple, and Meta. And despite being open to listing smaller, newer companies, it’s no longer much different than the New York Stock Exchange—its prestigious predecessor.
Like any stock exchange, the Nasdaq allows investors to buy and sell shares of a company. That in turn can generate personal wealth for everyday investors and clients represented by institutional investors—while that company is given the opportunity to raise capital through the public market. If you’re looking to start investing, understanding stock exchanges, like the Nasdaq, is key. That can mean reviewing the companies listed on the exchange and simply using the Nasdaq composite as a way to measure stock performance.
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