What UK investors need to know about US Stock Exchanges

Many of the world’s most successful investors have made their fortunes in the United States but as a wise man once said: “A fool and his money are easily parted”. So before setting off on a transatlantic journey to the land of Buffett, Graham and Greenblatt it’s vital to get some initial bearings.

This article is part of Stockopedia’s complete Guide to Getting Started in US Shares. You can read our introduction to the series here and a look at the diversification benefits of investing in the US here. This week we take a look at how America’s main stock exchanges work.

Big beasts of US markets

Unlike in the UK where the London Stock Exchange handles the majority of equity listings, the US is home to several trading venues. The most famous are a pair of titans - the New York Stock Exchange and the Nasdaq - the two biggest stock exchanges in the world.

But the US also has a number of regional exchanges and several 'Over the Counter' exchanges (OTC) where intrepid small-cap investors can regularly be found mining for hidden gold.

The aggregated data in the table below shows the current universe of US coverage we have at Stockopedia across the three main venues of trading. It's clear from the table that analyst coverage is not as deep amongst the OTC exchanges as on the NYSE and Nasdaq exchanges. The good news is that we rank a much higher percentage of stocks for their combined level of quality, value and momentum in our proprietary StockRanks on each exchange.

*Data accurate as of 30th July 2014

Investing in the New York Stock Exchange

The New York Stock Exchange (NYSE) is is easily the world’s largest stock market in terms of capitalisation - with a colossal value of $16,613,000,000,000. That's a lot of zeros. It is a bountiful hunting ground for investing in some of the world's biggest, prestigious and most profitable companies. Global names like Nike, Ford, Johnson & Johnson and Walt Disney are all here. So whether you've worn it, driven it, washed in it or watched the movie - the NYSE is where you can invest in it all.

Investors can take comfort from the fact that any company wanting to list on the NYSE must pass strict initial and ongoing listing requirements that test for size, liquidity and fundamentals. As a result, a listing on the NYSE is generally regarded with huge esteem in the corporate world.

The NYSE is owned by Intercontinental Exchange Inc, which also runs a number of equities, options and futures exchanges. Among them is the small-cap growth company focused NYSE MKT (formerly known as the American Stock Exchange) and a  trading venue for Exchange Traded Funds (ETFs) called the NYSE Arca.

TIP! You can identify and filter for stocks and ETFs trading on NYSE exchanges by their exchange codes in the Stockopedia Directory. NYQ for the NYSE, ASQ for the NYSE MKT, and PCQ for NYSE Arca. These codes also appear in the web page links prepended to company tickers - for example NYQ:F is the code & ticker for Ford.

Trading in NASDAQ stocks

It wouldn't be America if there wasn't a serious competitor lurking around every corner. In the UK the London Stock Exchange has a virtual monopoly on equity listings, but the US is home to a second vast stock exchange - the Nasdaq (National Association of Securities Dealers Automated Quotations).

It was set up in 1971 as an electronic trading platform connecting dealers remotely away from an exchange. Perhaps as a result of this electronic distinction, Nasdaq became home to many of the world's most famous technology companies such as Apple, Microsoft and Google. But the market really rose to fame during the 1990s dotcom boom when the hot stocks of the day like Yahoo, Ebay and Doubleclick shot to the moon and back.

There are three tiers to the Nasdaq...

- Nasdaq Global Select Market: Large cap firms which meet the exchange's strictest financial and liquidity requirements.

- Nasdaq Global Market: Companies listed here are generally mid cap and the financial and liquidity requirements are less severe than the Global Select.

- Nasdaq Capital Market: Small caps list on this exchange. Listing requirements are again more relaxed.

TIP! You can identify and filter for stocks trading on Nasdaq exchanges by their exchange codes in the Stockopedia Directory. NSQ for the Nasdaq Global Select, NMQ for Nasdaq Global, and NAQ for Nasdaq Capital.

How OTC Exchanges work

When a stock no longer qualifies for the stringent ongoing listing requirements of the main national exchanges (due to deteriorating share price or quality), where does it go? In the US it will often end up joining the many thousands of stocks that trade 'over the counter' (OTC).

If that sounds a bit suspect, well it often is. Jordan Belfort, the Wolf of Wall Street, made much of his money pushing these kinds of stocks onto unsuspecting victims. The 'low or no' listing requirements and the opaque nature of ‘OTC’ stocks make them perfect for pump and dump fraudsters to manipulate. One regularly finds that these stocks trade for less than a dollar per share, have tiny market caps and have wide differences between the ‘buy’ and ‘sell’ price (known as the spread).

But don't be completely put off, there are good companies amongst the bad - you just have to know how to pan for the gold, which is where a really good stock screener can help. OTC companies include highly regarded international corporations like Adidas and Roche who may use the OTC market as a way of gaining exposure to US investors without having to meet the full listing requirements of the main exchanges.

The two main operators of OTC exchanges are the OTC Markets Group, a private company, and the OTC Bulletin Board, which is owned by Nasdaq. While the two markets compete for the trading rights of all these equities, you will find that Nasdaq provides quotes for a number of the higher quality stocks on OTC Markets. OTC stocks that are not quoted on either of these exchanges are traded in so-called grey markets.

TIP! You can identify and filter for stocks trading on the OTC Exchanges by their exchange codes in the Stockopedia Directory. OTC for OTC Markets, PNK for OTC Pink, and OBB for OTC Bulletin Boards. Just remember to check the fundamental timeliness, audit quality and the bid-ask spread of all stocks before making investment decisions. Approximately half of these stocks are not awarded StockRanks as a result of missing information.

OTC Markets Group Exchanges

OTC Markets Group uses the electronic quote system OTC Link, which is is regulated by the SEC. Due to the notoriety of OTC stocks it has a categorisation system to help investors separate the wheat from the chaff.

- OTCQX is the gold tier and lists many multinational companies and US growth stocks which must pass various tests to be listed including having a investment firm as sponsor.

- OTCQB is the next tier down which requires a minimum bid price and an annual certificate to verify company accounts, reports, shareholders and PR firms.

- OTC Pink Sheets is the Wild West.  There are basically no standards or requirements - there are further tiers here which categorise financial reporting timeliness but buyer beware.

OTC Bulletin Board

OTCBB requires all companies to file financial statements with the SEC (or a banking or insurance regulator), but even so most stocks are barely traded microcaps. The exchange is driven by quotes entered by participating dealers, but has suffered with the rise of the OTC Markets platform. Many stocks are traded at both venues.

Join Stockopedia on our journey to the US

Stockopedia’s new US investment research service offers the comprehensive tools that our users love - made available for 10,000 stocks across all US markets.

With the inclusion of the USA Edition at Stockopedia, subscribers are now able to apply our extensive range of StockRanks, StockReports and and Screening resources to over 19,000 stocks. We hope these tools will help you find the cheapest, best quality and fastest moving companies in the western world, compare the world’s biggest brands cross region and analyse the most outstanding global corporations. Please do check out the options available.

Get our detailed guide to everything UK investors need to know about American markets. If you want to invest in the most dynamic shares in the world, this 60 page eBook is for you.