Understanding the Nasdaq and how it differs from the NYSE

The Nasdaq is the largest digital stock market for trading securities in the world. Here we explain the basics of what sets it apart from exchanges such as the NYSE.

Video Transcript

- What is the NASDAQ? The NASDAQ is the world's first and biggest computerized network for securities trading. Founded in 1971, NASDAQ stands for the National Association of Securities Dealers Automated Quotations System. Its computer network provides instant information about securities and prices in the over-the-counter market and other negotiated trades.

The NASDAQ is primarily a platform for the over-the-counter or OTC securities market. That segment of the secondary market for securities where trades are negotiated directly between buyers and sellers. To be listed on the NASDAQ, companies must meet certain minimum requirements for asset value and financial practices, although, these are not as stringent as the listing requirements for the major exchanges.

Some companies listed on the New York Stock Exchange are also traded on the NASDAQ, which is known as third market trading. Securities trading in the NASDAQ system is based on market makers who act as dealers, which own inventories of securities they can sell to the public or which they are willing to buy. A NASDAQ market maker lists two prices for any given security.

The bid price is the highest price the firm is willing to pay for a security and the ask price is the lowest price the firm is willing to sell the security. Those two prices create a range known as the spread in which the actual buying or selling price is negotiated between buyers and sellers. NASDAQ trades are also handled by brokers who arrange transactions between dealers and the public. Brokers receive a commission for their service, while dealers charge a markup when they are selling or a markdown when they are buying to cover the cost of the transaction. Stay financially fit, friends.