Never forget these two axioms:
Money frees us, but its pursuit may enslave us.
It’s not about how much you have at the end; it’s how much you could have made.
Stock Exchanges
Not to get too big of a head, but let me quote myself from an earlier post…
Realize that not only stocks, but bonds and other securities (i.e., any tradeable financial instrument) can be bought and sold (i.e., traded) in what are commonly called “stock exchanges” or just “exchanges”, but clearly involve far more than stocks alone.
There are 18 stock exchanges in the world that have a market capitalization (i.e., all the combined value of all the stocks of all the companies in said exchange) of over $ 1 trillion (US) each. They are sometimes referred to as the “$1 Trillion Club”. These 18 exchanges accounted for ~90% of global market capitalization in 2015.
The below are the top twenty exchanges in the world ranked by market capitalization.
(The below are the name of the exchange, country, city, and market capitalization in millions of US dollars as of October 2017.)
1.) New York Stock Exchange United States New York 21,377
2.) NASDAQ United States New York 9,585
3.) Japan Exchange Group Japan Tokyo 5,974
4.) Shanghai Stock Exchange China Shanghai 5,043
5.) Euronext European Union Amsterdam/Brussels/Lisbon/London/Paris 4,388
6.) London Stock Exchange United Kingdom London 4,297
7.) Hong Kong Stock Exchange Hong Kong 4,135
8.) Shenzhen Stock Exchange China Shenzhen 3,688
9.) TMX Group Canada Toronto 2,360
10.) National Stock Exchange of India India Mumbai 2,194
11.) Deutsche Börse Germany Frankfurt 2,181
12.) Bombay Stock Exchange India Mumbai 2,175
13.) Korea Exchange South Korea Seoul 1,683
14.) SIX Swiss Exchange Switzerland Zurich 1,649
15.) Nasdaq Nordic Northern Europe, Armenia Stockholm 1,561
16.) Australian Securities Exchange Australia Sydney 1,428
17.) JSE Limited South Africa Johannesburg 1,129
18.) Taiwan Stock Exchange Taiwan Taipei 1,068
19.) BM&F Bovespa Brazil São Paulo 935
20.) BME Spanish Exchanges Spain Madrid 896
The New York Stock Exchange (NYSE)
New York, New York…The Big Daddy of Them All…Make It There and You’ll Make It Anywhere
The New York Stock Exchange (NYSE) is by far the largest of all the exchanges at over $21 trillion (roughly the value of the next four biggest exchanges in the world combined) with daily trading over $30 billion (often over $35-40 billion) and even a few days in 2017 near or above $100 billion just for that day.
There’s a reason for all this money floating around.
To be listed on the NYSE, a company must have issued at least one million shares of stock worth $100 million and must have earned more than $10 million over the last three years. The entry fee to the NYSE is up to $500,000-$75,000 with a yearly listing fee of up to $500,000 as well.
Yeah, your corner Gas-n-Sip isn’t going to cut it…unless it’s one of 400 locations.
The NYSE is open for trading Monday through Friday from 9:30 am – 4:00 pm EST, with the exception of holidays. So, putting in buy or sell orders after work means it will only be done the next trading day.
Believe it or not, the NYSE is a giant series of simultaneous auctions on all the stocks in the exchange where traders can trade stocks on behalf of investors. The traders who work for the NYSE literally huddle around the appropriate post where a specialist broker, who is employed by a NYSE member firm (ie, not an employee of the NYSE), acts as an auctioneer in an open air auction where buyers and sellers are brought together to execute transactions. If you see any movies like “Trading Places” where they show the trading floor of an exchange, it looks chaotic. And in the days of pen and paper, quite frankly, it was.
Of historical record, on September 25, 1995, NYSE member Michael Einersen, who designed and developed this system, executed 1000 shares of IBM through wireless hand-held computers (HHC) (it was his honor to do so since he designed and developed the system which allowed traders to both receive and execute trades electronically) ending a 203-year process of paper only transactions forever. Within two years, virtually all companies’ stocks could be traded electronically. Well over 90% of the trades at the NYSE are done electronically allowing for last minute, end of the day trades with nearly instantaneous execution.
Following the Black Monday market crash in 1987 (October 19, 1987, the largest one day DJIA percentage drop [22.6%, or 508 points at that time] in history occurred), the NYSE imposed brakes on trading to decrease volatility and hopefully end massive panic selling.
The NYSE has set the following three thresholds based on the average closing price of the S&P 500 (note that it’s the S&P 500 used for the benchmark and not the DJIA) for the preceding trading day.
They are the following:
Level 1: -7%
Level 2: -13%
Level 3: -20%
Therefore, if there is a level 1 or level 2 decline, there will be a 15 minute stoppage in trading (unless it occurs after 3:25 pm in which case no stoppage in trading occurs).
A Level 3 decline, on the other hand, triggers a suspension of trading being for the remainder of the day no matter when it occurs.
The NASDAQ (National Association of Securities Dealers Automated Quotations)
The NASDAQ is the world’s second largest stock exchange as noted above (pretty impressive since it only started in 1971) and, as mentioned before, it tends to be heavy in technology companies. Microsoft, Apple, Cisco, Oracle, Dell, Google, Amazon, Facebook, and Netflix (but no chill) all debuted on the NASDAQ. It is still the go to exchange for the emerging technology company to debut on.
(In contrast to the NYSE, to be listed on the NASDAQ a company must have issued at least 1.25 million shares of stock worth at least $70 million and must have earned more than $11 million over the last three years. Speaking of contrast…the entry fee to the NASDAQ is $50,000-$75,000 with a yearly listing fee of ~$27,500. It’s good business to have low entry fees for tech startups gone big who are low on cash—which is the whole reason the company is offering shares in the first place.)
Not surprisingly, the NASDAQ was the first exchange in the US to start trading online, highlighting Nasdaq-traded companies and closing each trade with the boastful claim (and not so subtle jab at the old, stodgy NYSE) that the NASDAQ was “the stock market for the next hundred years”.
As of June 2015, the NASDAQ has an average annualized growth rate of 9.24% since its opening in February 1971.
Since the end of the so called “Great Recession” in June 2009, it has increased by 18.29% on average per year.
The NASDAQ Composite Index has actually more than quadrupled since January 2009.
Again, this is not at all surprising given how many of the largest technology companies (most of which are listed on the NASDAQ) are doing in the last forty years and especially the last decade.
Just so you know, there is a third stock exchange (also in New York just so they’re not feeling left out) called the American Stock Exchange or AMEX where approximately 10% of all the securities in the US traded. So, though you may have never heard of it, this is no small, cheap, chump change operation.
Once a major competitor of the NYSE before the NASDAQ came along in 1971, the American Stock Exchange is now mostly known for trading in small cap stocks, options, and exchange traded funds. Actually, AMEX is where ETFs were first employed.
AMEX has the least strict listing requirements among the three top American exchanges, which consequently results in many small companies joining it rather than the other two.
If you haven’t heard of Peabody Energy, you probably haven’t heard of any of the other companies listed on the American Stock Exchange.
Back to the Big Two…
So both the NYSE and NASDAQ are US stock exchanges (the two largest in the world) that the vast majority of publicly traded US companies are listed on with different entry fees.
The NASDAQ is owned and run by a for profit company. The NYSE was a non-profit entity…until March 8, 2006 when the NYSE became a for profit company publicly traded…on the NYSE. (To blow your mind further, the NASDAQ trades…on…wait for it…yep, you guessed it…the NASDAQ.)
So what’s the difference between the two?
Two principal differences:
1.) The NYSE has its trading occur on an actual physical “trading floor” at 11 Wall Street NYC. The NASDAQ doesn’t have a physical location for trading, but rather is a telecommunications network upon which all their online trading occurs.
2.) As noted before, the NYSE is like the world’s largest auction house where thousands of auctions between buyers and sellers happen every trading day (i.e., an auction market—I know, I know, I used the word ‘auction’ three times in one sentence, but there is no good synonym for that word I will not mention again in this post.) In the NYSE, you’re buying essentially what someone else has just sold.
The NASDAQ, though, is what is known as a dealer’s market where both buyers and sellers conduct their desired business through a third party.
That’s really it as far as us retail investors are concerned.
One last thing…
ADRs
Dr. Unwise: Uh…what now?
Dr. Scared: This is it! This is how they screw you!! Money under the mattress is the only way to go!
PWT: Uh, yeah, anyway…
ADRs or American Depository Receipts is how a non-US company can be listed on a US stock exchange. Think about it for a second. How does a, say, company in the UK like BP (it is British Petroleum after all) which is already listed on the London exchange get listed in the US? Honestly, what company wouldn’t want to have access to all the money American investors, retail and institutional, (aka the US capital market) provide?
So, this is how BP pulls off the neat trick of being listed at home in London and again in New York.
Before 1927 when ADRs were first introduced, the only way an American could buy into a foreign company was to buy shares on a foreign exchange.
The problem with that is twofold:
1.) You’re at the mercy of regulations in whatever country your company of choice is from.
2.) Currency fluctuations and foreign taxes may wipe out your gains.
An ADR is a US bank issued certificate that represents a share or a number of shares (or even a fraction of a share) in a foreign company that is traded in a US exchange. (To be more precise, every ADR is issued by a US bank [known as the custodian bank] once the underlying shares of the foreign company are deposited in a bank of the same country of the foreign company.)
They act, feel, and trade like any other shares of any other company. ADRs are bought, valued, and even pay dividends in US dollars.
Generally speaking, the ADR moves in parallel with the foreign stock in its home country (but adjusted for the ratio of ADRs to shares of the foreign company in question since they don’t have to be 1:1).
Of note, UK companies that set up ADRs generate a 1.5% “creation fee” that you get to pay for the privilege of buying the ADRs of said UK company.
Other than a few exceptions like the above, ADRs should be evaluated, treated, and traded like any other stock.
Whew!
Enough.
I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.
Talk to you soon.