The beginning of stock exchanges…

It’s interesting to realize just how long a history our stock exchanges have. Back in 1792 (just a decade and a half after the founding of our country!) twenty-four New York City merchants signed an agreement under a Buttonwood tree on Wall Street. The new exchange, later called the New York Stock Exchange, began with a listing of merely five stocks, the first being the Bank of New York.

In the 1800s, a second stock exchange was started, known as the Curb Exchange. In 1953, that exchange later became known as the American Stock Exchange. Finally, in 1971, the AMEX merged with the National Association of Security Dealers to form the NASDAQ, the world’s first electronic stock market.

Two different methods of exchange…

While the New York Stock Exchange retains a physical trading floor on Wall Street (although a significant portion of its trades flow through a data center in New Jersey), the NASDAQ has no trading floor. An even more important difference is the fact that the NYSE is an auction market, which means that individual buyers and sellers can enter orders, with bids and asks paired by the exchange. The NASDAQ, in contrast, is a dealer market. Buyers and sellers do not trade with each other directly, with transactions going through dealers.

Perceptions of the two exchanges…

Companies that list on the NYSE are generally perceived as being more stable and well-established, while smaller, more growth-oriented companies, especially technology companies, tend to be listed on the NASDAQ. In fact, the NASDAQ’s lower listing costs are favorable for newer companies.

Stock indexes vs. stock exchanges…

While a stock exchange is a place (real or virtual) to buy and sell securities, a stock index is a gauge or a system to measure changes in the price of groups of securities. There are some 5,000 different stock indexes, with the main three in the U.S. being the Dow Jones Industrial Average, the Standard & Poor’s 500 Index, and the NASDAQ Composite Index.

Dow Jones Industrial Average… 

The DJIA is one of the oldest and most often used of the indexes. The Dow includes the stocks of 30 of the largest and most influential companies in the U.S. When launched in the late 1800s by Charles Dow, the index’s original value was just under 41 points! 

The Standard & Poor’s 500 Index… 

The S&P500 Index dates back to 1923, originally covering 233 companies. In 1957, the index expanded to include 500 different companies. The collection of stocks is intended to represent the overall makeup of the U.S. economy. Over its first decade in existence, the index rose to 700, later falling to 300.

The NASDAQ Composite Index…… 

Founded in 1971, the NASDAQ is the youngest of the three major exchanges, and the index was born at the same time, originally measuring around 680. This index has the largest number (more than 2,000) of different stocks of the three indexes, with a high concentration of technology stocks.

You don’t trade an index….

Remember, indexes are not exchanges. Investors cannot trade the Dow, the S&P 500, or the NASDAQ Composite. While index funds or exchange-traded funds track the Dow, the S&P, or the NASDAQ Composite, the three indexes are simply representations of the average performance of a certain grouping of stocks. 

Ever since those New York merchants met under the Buttonwood tree, Americans have been trading stock on exchanges, using indexes for measuring and decision-making.This article provided courtesy of Sheaff Brock Investment Advisors. Learn more about Sheaff Brock history.