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nasdaq stock market image

The complex financial workings behind NASDAQ

Nasdaq or the Nasdaq Stock Market is a New York City-based global electronic marketplace selling and buying securities, which are tradable financial assets. The abbreviation stands for National Association Securities Dealers Automated Quotations. It has the same principles of a real-time financial market based on accurate real-time quotes and offers. In short, Nasdaq provides a platform where people trade stocks.

Did you know that market specialists regard Nasdaq as subordinate to the New York Stock Exchange on the list of stock exchanges by market capitalization of shares traded? Nevertheless, Nasdaq was the very first electronic stock market. In order to have a better grasp on the ins and outs of Nasdaq, we must plunge our way into its ‘object of desire’, expressly trading with financial securities.

What is security in terms of finance?

Financial security grants you peace of mind when you don’t have to worry about your money covering bills. It also implies that you have enough money put aside to meet unexpected expenses as well as your long-term financial goals. Imagine a certificate of a specific monetary value providing you, as a holder, with the rights of how and where to allocate the income of a business, a publicly traded corporation you invested in.

Beware, most financial securities do no longer refer to legal ownership over a company! It refers to the fact that you own an asset without taking physical possession of it. You can trade security, meaning you exchange it for money under certain circumstances. Trade security in the form of negotiable stocks, bonds, and derivatives! Once available in a physical format, they are primarily electronic nowadays.

Equity Securities

A company can release equity security or a share of interest in its capital. By purchasing a share or already owning one, you contribute to the capital of the business entity. The more shares you are buying, the higher your contribution is to the company’s money or revenue. In addition, if you buy a lot of equity securities, you can become a shareholder and, ultimately, one of the company’s owners. As a shareholder, you receive an amount from the profits, you can vote regarding its future. The flipside of the coin is that you will be paid after all financial obligations were acquitted when facing bankruptcy. That is in the most fortunate scenario.

Debt Securities

If you contribute with a loan to a company, you virtually buy debt security. In other words, a company will owe this debt to capital lenders. Bonds, debentures, commercial paper are debt securities of fixed-period nature differing in their interest rate, renewal date, collateral, maturity, etc. You are a creditor of the company, not an owner (as in equity securities).

Corporate bonds’ lifespans are of longer maturity. Lenders, however, receive interest on their loans till the bond expires. The rule is that debenture holders, in case the company faces extinction, get paid first, then ordinary shareholders. For this reason, debt securities are a safer investment than equity securities. Still, at fixed interest rates, debenture holders do not receive any share after the company’s profit.

Derivative Securities

More sophisticated than the other two, derivative security implies a financial instrument whose value is set by the worth of another asset, for instance, bonds, stocks, currencies, etc. Derivatives are used to isolate various types of risks, such as currency fluctuation, sudden change in the interest rates, movement in index prices, etc.

A derivative’s value changes with the worth of the underlying asset and often prays on the fragility of the market. Members of the derivatives market frequently speculate on the purchase cost that does not correspond to their actual financial capability.

Nasdaq’s intricate working structure

Through highly performant computers, Nasdaq manages to connect stock buyers and sellers. Their fully computerized system is made up of an excellent interface where brokers, dealers, and traffic controllers gain access to the system. Traffic controllers play a crucial role here. They are the so-called market makers, who actively purchase and sell stocks on behalf of traders.

The second part of their platform is the matching system. It connects buyers and sellers when their prices match.

The last and perhaps most significant part is quote services using supply and demand and the current price. They elaborated a complex algorithm to update information by the minute.

How to list your company on Nasdaq?

The National Association realizes electronic trade through ECN, electronic communication networks. If you wish to enlist your company in Nasdaq, you must meet specific requirements. First of all, you have to be able to offer 1,250,000 publicly traded shares as opposed to only 1,1 million shares required to list your firm on the New York Stock Exchange. These shares must not include those held by officers, directors, or owners of more than 10% of the company.

Secondly, “The minimum bid price requirement stems from Section 5550(a)(2) of the Nasdaq’s Equity Rules guide. clearly states: “(a) Continued Listing Requirements for Primary Equity Securities: (2) Minimum bid price of at least $1 per share.” (Source the Bowser Report)

Thirdly, you must consider the entrance fee to the club. Initially, listing the same number of shares on Nasdaq will cost you $80,000. In addition, you must pay a $27,500 annual fee.

Comparison with the New York Stock Exchange

The NYSE offers more stability for their enlisted stocks than Nasdaq. For this reason, NYSE charges companies with a $300,000 admission fee and an additional $69,800 perceived as yearly commission. The New York-based market hosts illustrious clients, such as Walmart and Coca-Cola, etc. Their value is unlikely to change in the foreseeable future.

On the other hand, Nasdaq has specialized primarily in tech companies (for instance Amazon, Facebook, Apple, and even Google, etc.). These are more volatile to fluctuations in the economy. Let’s suppose many are not satisfied with the brand new iPhone, and the general dissatisfaction leads to disappointing sales. Then, the price of the stock plummets on Nasdaq too.

Naturally, profit doesn’t come without its proper price. If you wish to accumulate a quick profit in the short run, you should choose Nasdaq. There are pretty high short-term capital gain taxes on the Nasdaq market imposed by the federal government, more precisely the tax-man, the Internal Revenue Service.

Fascinating trivia on Nasdaq

Nasdaq is known for representing cutting-edge technologies in the following domains:  computer hardware and programming, telecommunications, biotechnology, media, transportation, and health care.

Therefore, the Nasdaq-100 index, launched in 1985, entails Tesla, Apple, Facebook, Microsoft, Starbucks, and 100 of the biggest domestic and international non-financial companies. All of them have registered a minimum of 50% sales growth ever since.

On the other hand, the Nasdaq Financial-100 is a sister index primarily concerned with financial companies listed on Nasdaq.

Conclusion

Every type of financial security has its pros and cons. However, all experts agree that you should invest in diversified securities to safeguard a stable source of returns. If you consider acquiring NASDAQ-listed stocks, you may do so by searching for the list of available items online. Then, place an order with the help of a stockbroker or through a stock brokerage site.Nasdaq represents a fascinating financial world, albeit not one without its hazards. However, the higher the risk, the greater the profit! Let us remind you that there are other thought-provoking investments too. You can decide now whether to invest in real estate, gold, or the stock market.

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