to as Nasdaq, but stocks continue to be traded and reported separately on the two
markets. Increased competition among global stock markets assuredly will result in
similar alliances among other exchanges and markets in the future.
Since most of the largest companies trade on the NYSE, the market capitalization of
NYSE-traded stocks is much higher than for stocks traded on Nasdaq (about $11.6 tril-
lion compared with $2.7 trillion in late 2001). However, reported volume (number of
shares traded) is often larger on Nasdaq, and more companies are listed on Nasdaq.^5
Interestingly, many high-tech companies such as Microsoft and Intel have re-
mained on Nasdaq even though they easily meet the listing requirements of the
NYSE. At the same time, however, other high-tech companies such as Gateway 2000,
America Online, and Iomega have left Nasdaq for the NYSE. Despite these defec-
tions, Nasdaq’s growth over the past decade has been impressive. In the years ahead,
the competition will no doubt remain fierce.What are some major differences between the NYSE and the Nasdaq stock
market?The Cost of Money
Capital in a free economy is allocated through the price system. The interest rate is the
price paid to borrow debt capital. With equity capital, investors expect to receive dividends and
capital gains, whose sum is the cost of equity money.The factors that affect supply and de-
mand for investment capital, hence the cost of money, are discussed in this section.
The four most fundamental factors affecting the cost of money are (1) production
opportunities,(2) time preferences for consumption,(3) risk,and (4) inflation.
To see how these factors operate, visualize an isolated island community where the
people live on fish. They have a stock of fishing gear that permits them to survive rea-
sonably well, but they would like to have more fish. Now suppose Mr. Crusoe has a
bright idea for a new type of fishnet that would enable him to double his daily catch.
However, it would take him a year to perfect his design, to build his net, and to learn
how to use it efficiently, and Mr. Crusoe would probably starve before he could put his
new net into operation. Therefore, he might suggest to Ms. Robinson, Mr. Friday, and
several others that if they would give him one fish each day for a year, he would return
two fish a day during all of the next year. If someone accepted the offer, then the fish
that Ms. Robinson or one of the others gave to Mr. Crusoe would constitute savings;
these savings would be investedin the fishnet; and the extra fish the net produced
would constitute a return on the investment.
Obviously, the more productive Mr. Crusoe thought the new fishnet would be, the
more he could afford to offer potential investors for their savings. In this example, we
assume that Mr. Crusoe thought he would be able to pay, and thus he offered, a 100
percent rate of return—he offered to give back two fish for every one he received. He
might have tried to attract savings for less—for example, he might have decided to of-
fer only 1.5 fish next year for every one he received this year, which would represent a
50 percent rate of return to potential savers.
How attractive Mr. Crusoe’s offer appeared to a potential saver would depend in
large part on the saver’s time preference for consumption.For example, Ms. Robinson
might be thinking of retirement, and she might be willing to trade fish today for fish26 CHAPTER 1 An Overview of Corporate Finance and the Financial Environment(^5) One transaction on Nasdaq generally shows up as two separate trades (the buy and the sell). This “double
counting” makes it difficult to compare the volume between stock markets.