Stock Exchanges Question 1: The New York Stock Exchange (NYS

Stock Exchangesquestion 1the New York Stock Exchange Nyse And The Na

The New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation (NASDAQ) are the two currently existing stock exchanges in the United States. The NYSE was founded in 1792 to list the companies in the U.S. market, whereas NASDAQ was established in 1971 and primarily lists technology firms globally. The NYSE is considered the world’s leading stock exchange, with a market value surpassing the combined value of NASDAQ, Tokyo, and London stock exchanges. Firms must adhere to listing standards set by the Securities and Exchange Commission (SEC), applicable to both domestic and international companies.

Companies have the flexibility to choose their preferred stock exchange based on their market strategy. The NYSE operates as an auction market where buyers and sellers bid competitively in real-time, and transactions occur on a physical trading floor, with some trades happening at its data center in Mawah, New Jersey. NASDAQ, on the other hand, is a dealer market without a physical trading floor; it facilitates trading through electronic platforms managed by market makers, which post buy and sell prices and control trading activity. The NYSE employs specialists to oversee market traffic, regulate stock prices, and manage order flow, whereas NASDAQ relies on market makers to perform these functions (Lobel, 2018).

Stock Market Examples and Financial Analysis of Selected Firms

Exelon Corporation, listed on the NYSE, is an energy provider operating across 28 U.S. states and parts of Canada. As of 2018, Exelon employed approximately 35,000 staff and generated about $36 billion in revenue (Yahoo Finance, 2019). Its core operations include power generation, transmission, and energy sales, serving a broad customer base in North America.

Akorn, listed on NASDAQ, is a pharmaceutical company that produces prescription medications and sells them across the United States, including generic and branded products in injectable, ophthalmic, and oral forms (Yahoo Finance, 2019). The company has facilities in Illinois, New York, and Cranbury, with subsidiaries in India and Switzerland, indicating a significant international presence.

Financial analysis reveals insights into these companies’ cash flows and ratios. Exelon’s free cash flow (FCF) in 2017 was negative at -$104,000, but improved to $896,000 in 2018, suggesting enhanced operational efficiency and increased income from non-capital assets. Conversely, Akorn’s 2017 FCF was $154 million but turned negative in 2018 at -$138 million, indicating declining investment in non-capital assets or operational challenges.

Liquidity ratios show that Akorn has a current ratio of 4.42, indicating strong liquidity, while Exelon’s current ratio is 1.12, reflecting a more moderate liquidity position. Asset management ratios suggest that Akorn has slightly better efficiency in asset utilization with a ratio of 0.46 compared to Exelon’s 0.31. Profitability ratios highlight that Akorn’s net income margin is about 58%, significantly higher than Exelon’s 6%, signaling higher profitability relative to sales for the pharmaceutical firm (Investopedia, 2020).

Stock Beta and Market Impact Analysis

Beta coefficients measure the volatility of a stock relative to the overall market. A beta greater than 1 indicates higher volatility than the market, while a beta less than 1 signifies lower volatility. Based on the previous homework, if the beta of Exelon is 0.8 and Akorn is 1.2, then Exelon’s stock is less volatile and more stable amidst market fluctuations, while Akorn's stock reacts more significantly to market changes.

In hypothetical market conditions where the overall market increases by 10%, stocks with betas less than 1, like Exelon, are expected to rise by approximately 8%, demonstrating lower sensitivity, while high-beta stocks like Akorn might surge by about 12%, indicating higher risk and reward potential (Fama & French, 2004). Looking at historical betas, if these have consistently remained around these values, it suggests that Exelon could provide a safer investment amid volatility, whereas Akorn could generate higher returns but with increased risk.

Furthermore, analyzing the historical averages and standard deviations of stock returns helps assess their risk profiles. A higher standard deviation indicates greater volatility, which investment managers consider when constructing diversified portfolios. For instance, if Akorn shows higher standard deviation compared to Exelon, investors seeking stability may prefer Exelon, despite potentially lower returns.

Conclusion

Understanding the distinctions between stock exchanges like the NYSE and NASDAQ is crucial for investors when considering where to list or purchase stocks. The differences in trading mechanisms, regulation, and market structure influence the trading environment and risk profiles of listed companies. Analysis of selected firms such as Exelon and Akorn highlights how financial performance, liquidity, asset management, and profitability metrics contribute to investment decision-making. Incorporating beta coefficients and statistical measures like the standard deviation enhances risk assessment, enabling investors to tailor their portfolios according to their risk tolerance and market outlook.

References

  • Fama, E. F., & French, K. R. (2004). The Capital Asset Pricing Model: Theory and Evidence. Journal of Economic Perspectives, 18(3), 25-46.
  • Investopedia. (2020). Understanding Financial Ratios. https://www.investopedia.com/terms/f/financialratio.asp
  • Lobel, M. (2018). Stock Exchanges and Market Structure. Financial Markets Journal, 14(2), 45-59.
  • Yahoo Finance. (2019). Exelon Corporation Financial Data. https://finance.yahoo.com/quote/EXC
  • Yahoo Finance. (2019). Akorn, Inc. Financial Data. https://finance.yahoo.com/quote/AKRX
  • SEC. (2018). Listing Standards for U.S. Stock Exchanges. U.S. Securities and Exchange Commission. https://www.sec.gov/rules/other/2020/33-10717.pdf
  • Smith, J. A. (2019). Financial Analysis of Energy Sector Companies. Journal of Portfolio Management, 45(1), 89-102.
  • Brown, D., & West, R. (2021). Stock Market Volatility and Risk Metrics. Financial Analysts Journal, 77(4), 40-55.
  • Chen, L., & Zhang, H. (2022). The Impact of Exchange Market Structures on Stock Volatility. International Journal of Financial Studies, 10(3), 156-174.
  • Standard & Poor's. (2020). Market Volatility and Beta Analysis Reports. S&P Global.

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