The Nasdaq and the NYSE are stock exchanges that trade securities. Nasdaq stands for National Association of Securities Dealers Automated Quotation and NYSE stands for New York Stock Exchange.
Both the Nasdaq and NYSE are publicly traded companies, and as such, investors can buy shares of each on public exchanges. The NYSE is owned by NYSE EuroNext Inc. and issues shares under the ticker symbol (NYSE: NYX). The Nasdaq is owned by Nasdaq OMX Group Inc., and its shares trade under the ticker symbol (Nasdaq: NDAQ).
As with the decision to invest in any company, research into the future profitability of the business must be undertaken. An investor would want to examine fundamental and technical characteristics before calling a broker and placing an order.
The Nasdaq was founded in 1971 to enable traders to trade securities on a speedy, transparent computerized system. The exchange split from the National Association of Securities Dealers in 2006. The exchange is headquartered in the United States and operates 26 markets—primarily equities, and also including options, fixed income, derivatives, and commodities.
New York Stock Exchange (NYSE)
The New York Stock Exchange was founded in roughly 1792 when four brokers signed what is known as the Buttonwood Agreement, setting some agreed-upon ground rules for securities trading. It is based in New York City and is the largest equity-based exchange in the world.
How to Pick Stock
Just because the Nasdaq and NYSE are publicly traded, as such can be invested in, does not necessarily mean investors should invest in them. Each individual needs to be evaluated on its own merits and compared against each investor's unique needs, goals and risk tolerance.
Before buying a stock, investors should examine a company's balance sheet, income statement, cash flow statement, and footnotes. These can be found in the company's annual report, also called its 10-K. The publication of 10-K reports is mandated by the U.S. Securities and Exchange Commission (SEC). Investors can find them on the SEC's public database, called EDGAR.
Once a stock has been analyzed, investors need to determine the potential return and volatility of the stock and whether that fits his or her particular profile. Another factor is how the stock fits in a portfolio. Most investors seek a diversified portfolio, hoping to achieve a target return while taking on the least amount of risk. Having a more concentrated portfolio increased the risk of big loss, but it also increases the total return potential. A stock's risk and return profile affects the total portfolio's risk and return profile, though by moving in the opposite direction of other holdings, a risky stock has the potential to make an overall portfolio less risky.
Individual Stocks vs. Index Funds
Modern Portfolio Theory (MPT) advocates diversification as a source of risk reduction. One easy way to diversify a portfolio is to invest in a mutual fund that tracks a larger index fund. It can be difficult to properly diversify a portfolio when picking stocks one at a time.
There are ETFs (Exchange Traded Funds) that track some of the most widely held stocks on the NYSE and the Nasdaq. The DIA ETF tracks the Dow Jones Industrial Average, one of the most widely followed indexes at the NYSE. The QQQ ETF tracks some of the most widely held stocks on the Nasdaq.