Stock Trading and Stock Exchanges
Overview
Investing in stocks is an option when planning for retirement or other financial management decisions. In this activity, you will research how to evaluate stocks as an investment option.
Instructions
In a 1-2-page paper, please respond to the following:
- Explain the differences in stock trading between two different stock exchanges.
- Identify two different stock exchanges in the United States.
- Describe the similarities and differences between the two stock exchanges.
- Explain how a company’s free cash flow impacts its growth potential. Cite the free cash flow of example companies.
- Identify one company on each of the two stock exchanges you researched in 1.
- Determine the free cash flow from 2019 and 2020 for each company.
- What inferences can you draw from the companies’ free cash flow?
- Apply financial ratios to evaluate the strengths and weaknesses of stocks as investments.
- Using the 2019 and 2020 financial statements for both stocks, prepare two financial ratios for each of the following categories: liquidity ratios, asset management ratios, and profitability ratios. You should have a total of six ratios for each stock, per year.
- What challenges, strengths, or weaknesses do you see when you examine these ratios?
Two different stock exchanges in the United States are the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq).
Similarities between the NYSE and Nasdaq:
- Both are regulated stock exchanges in the United States where publicly traded companies list their stocks for trading.
- They provide a platform for buyers and sellers to trade securities, including stocks, bonds, and exchange-traded funds (ETFs).
- Both exchanges have specific listing requirements that companies must meet to be listed on their respective exchanges.
- They provide transparency and ensure fair trading practices through their rules and regulations.
Differences between the NYSE and Nasdaq:
- Trading Mechanism: The NYSE is an auction-based market where buyers and sellers trade stocks on the exchange floor through designated market makers. On the other hand, Nasdaq is a dealer’s market, operating through a network of market makers who facilitate trading electronically.
- Listing Requirements: The NYSE has more stringent financial and corporate governance requirements for listing compared to Nasdaq. The NYSE typically attracts larger, more established companies, while Nasdaq tends to be popular among technology and growth-oriented companies.
- Market Structure: The NYSE has a physical trading floor where traders gather to execute orders, and it uses the “dual auction” method to determine stock prices. Nasdaq, being an electronic exchange, does not have a physical trading floor, and stock prices are determined through continuous trading based on supply and demand.
- Number of Listings: Historically, the NYSE had more listed companies, including many large, well-known corporations, while Nasdaq was associated with technology and growth-oriented companies. However, over time, Nasdaq has attracted a broader range of listings, including companies from various industries.
Free cash flow is a measure of a company’s financial performance and represents the cash generated by a business after accounting for operating expenses and capital expenditures. It is an important indicator of a company’s ability to invest in growth opportunities, pay dividends, reduce debt, or repurchase shares. Companies with strong free cash flow have greater flexibility to reinvest in their operations, research and development, and acquisitions, which can fuel growth. Conversely, companies with negative or low free cash flow may face limitations in pursuing growth initiatives or may need to rely on external financing, which can impact their growth potential.
