Stock exchanges

Stock exchanges

The NYSE

Another way of looking at stocks is by where the stocks are traded. Most of the large blue chip stocks are traded on the New York Stock Exchange. The NYSE, also called the Big Board, lists about 3,000 firms, including many foreign companies.

The NYSE uses an auction method of trading stocks where a so-called specialist matches buy and sell orders.

AMEX

This method of trading stocks is also seen on the American Stock Exchange, or AMEX. The AMEX is smaller than the NYSE, and the AMEX lists a relatively large number of energy companies.

NASDAQ

The Big Board's main competitor, however, is the NASDAQ market. Although NASDAQ lists 5,000 companies, or 2,000 more companies than the NYSE, the total market capitalization of the Big Board is larger than NASDAQ.

This is because NASDAQ lists smaller, newer companies. However, many multi-billion dollar companies like Intel and Microsoft are listed on NASDAQ.

NASDAQ, however, uses a different method of trading stocks. Unlike the NYSE, NASDAQ does not use specialists to match buy and sell orders.

Instead, NASDAQ features a number of so-called market makers. These market makers must offer bid and ask prices for those stocks that they make a market in.

A number of market makers are supposed to maintain an orderly and competitive market, and market makers can keep inventories of stocks. In fact, the ability to buy and sell stocks from their inventory gives market makers a good chance to make money.

The over-the-counter market

In addition to the NASDAQ, there's the so-called over-the-counter market. This market includes nearly 30,000 publicly traded companies, but the trading volume of these stocks is low.

Prices of these stocks used to be published on pink paper, so these stocks are still sometimes called pink sheet stocks. These stocks aren't listed on any of the major exchanges, but they are still publicly traded. Many of these stocks are low-priced, so-called penny stocks.

Penny stocks

If you ever get a cold call from a broker trying to sell you a fast-rising but unknown company, think twice before buying the stock. Many of these stocks are thinly traded, so it's easy for a few people to ramp up the price of the stock by trading the stock amongst themselves.

This can produce spectacular price increases, and provides evidence that the stock can "only go up". On the way up the original investors cash out as pushy brokers sell the stock to outside investors who provide the escape mechanism.

However, after the original speculators leave, trading volume in the stock dries up, and the outsiders are left holding expensive shares that they can't sell to anyone at any price.

There are many excellent, small companies that aren't listed on the major stock exchanges, but unless you know what you're doing here's a good piece of advice : Don't buy any stock whose value you can't determine by looking it up in your local newspaper.