The second type of exchange is the virtual sort called an over-the-counter (OTC) market, of which the Nasdaq is the most popular. These markets have no central location or floor brokers whatsoever. Trading is done through a computer and telecommunications network of dealers. It used to be that the largest companies were listed only on the NYSE while all other "second tier" stocks traded on the other exchanges.

The tech boom of the late 90s changed all this; now the Nasdaq is home to several big technology companies such as Microsoft, Cisco, Intel, Dell, and Oracle. This has resulted in the Nasdaq becoming a serious competitor to the NYSE.

The trading floor of the NYSE

On the Nasdaq brokerages act as "market makers" for various stocks. A market maker provides continuous bid and ask prices within a prescribed percentage spread for shares for which they are designated to make a market. They may match up buyers and sellers directly but usually they will maintain an inventory of shares to meet demands of investors. We won't get into the process here since we cover this in detail in our tutorial entitled "Electronic Trading and Market Makers."

Other Exchanges

The third largest exchange in the U.S. is the American Stock Exchange (AMEX). The AMEX used to be an alternative to the NYSE, but that role has since been filled by the Nasdaq. In fact, the National Association of Securities Dealers (NASD), which is the parent of Nasdaq, bought the AMEX in 1998. Almost all trading now on the AMEX is in small-cap stocks and derivatives.

There are many stock exchanges located in just about every country around the world. American markets are undoubtedly the largest and thus most important, but they still represent only a fraction of total investment around the globe. The two other main financial hubs are London, home of the London Stock Exchange, and Hong Kong, home of the Hong Kong Stock Exchange.

We've got a complete list of exchanges from around the world here. The last place worth mentioning is the over-the-counter bulletin board (OTCBB). The Nasdaq technically is an over-the-counter market, but the term commonly refers to small public companies that don’t meet the listing requirements of any of the regulated markets, including the Nasdaq. The OTCBB is home to penny stocks because there is little to no regulation. This makes investing in an OTCBB stock very risky. You really need to know what you're doing here or you'll get burnt! Chances are, if you're reading this tutorial you don't want even to consider the OTCBB.

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