The NASDAQ is one of the exchanges that account for the trading of a major portion of equities in North America and the world. Equities are exchanged between buyers and sellers in NASDAQ as in the case of the other stock markets. Knowing how the NASDAQ functions will help an investor understand the function of a stock exchange and the mechanics behind the buying and selling of stocks.
The location of an exchange refers not so much to its street address but the ``place'' where its transactions take place. Foe example, on the NYSE (the New York Stock Exchanege), all trades occur in a physical place, on the trading floor of the NYSE. So, when you see those guys waving their hands on TV or ringing a bell before opening the exchange, you are seeing the people through whom stocks are transacted on the NYSE.
The NASDAQ, on the other hand, is located not on a physical trading floor but on a telecommunications network. People are not on a floor of the exchange matching buy and sell orders on the behalf of investors. Instead, trading takes place directly between investors and their buyers or sellers, who are the market makers, through an elaborate system of companies electronically connected to one another.
The fundamental difference between the NYSE and NASDAQ is in the way securities on the exchanges are transacted between buyers and sellers. The NASDAQ is a dealer's market, wherein market participants are not buying from and selling to one another but to and from a dealer, which, in the case of the NASDAQ, is a market maker. The NYSE is an auction market, wherein individuals are typically buying and selling between one another and there is an auction occurring; that is, the highest bidding price will be matched with the lowest asking price.
Each stock market requires people who are at the ``intersection'' where buyers and sellers ``meet'', or place their orders. On the NASDAQ, these people are known as the market makers, who, we already mentioned, transact with buyers and sellers to keep the flow of trading going.
The market maker ``creates a market'' for a security and ensures smooth and orderly markets for clients. If too many orders get backed up, the market makers of the exchanges will work to match the bidders with the askers to ensure the completion of as many orders as possible. If there is nobody willing to buy or sell, the market makers of the NASDAQ will try to see if they can find buyers and sellers and even buy and sell from their own inventories.
One thing that we cannot quantify but must acknowledge is the way in which the companies on NASDAQ are generally perceived by investors. The NASDAQ is typically known as a high-tech market, attracting many of the firms dealing with the Internet or electronics. Accordingly, the stocks on this exchange are considered to be more volatile and growth oriented.
A company's decision to list on NASDAQ is important in many ways. One factor that makes companies choose NASDAQ is its lower listing requirements compared to the NYSE. So growth-type stocks (companies with less initial capital) are more likely to be found on the NASDAQ.
The NASDAQ, like the NYSE, accommodates the major portion of all equities trading in North America, but these exchanges are by no means the same.