- The Nasdaq is the world's largest electronic stock exchange with two closely watched indexes: the Nasdaq Composite and the Nasdaq 100.
- Technology, consumer services, and other growth stocks dominate Nasdaq and have caused it to outperform other stock markets in recent years.
- The easiest way for individual investors to participate in the Nasdaq's volatile but high-performing stocks is via index funds.
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The Nasdaq is the largest and oldest electronic stock market in the world, meaning all of its buying and selling happens electronically, rather than on a physical trading floor. Short for National Association of Securities Dealers Automated Quotations, the Nasdaq is the second-largest stock exchange globally based on the market capitalization of its listed companies - exceeded only by the New York Stock Exchange (NYSE).
A pioneer in online operations when it launched in 1971, the Nasdaq provided a listing service for companies that had previously only traded over-the-counter (OTC). It quickly became the home for many new and innovative high-tech startups, including Microsoft and Apple.
Today, the Nasdaq plays an important role in the US and global economy, with its two major indexes - the Nasdaq Composite and the Nasdaq 100 - closely watched barometers of business.
To help you make sense of it all, here's what you need to know about the Nasdaq, from what it is to smart strategies for investing.
What is the Nasdaq?
The Nasdaq is technically a dealer market where both buyers and sellers trade with a market maker in a particular stock or security, unlike an auction market (like the NYSE) where buyers and sellers trade with each other through a broker.
Nasdaq fast facts
- 3,889 listed companies trade on Nasdaq.
- Nasdaq's listed companies are collectively worth $11.23 trillion.
- Over 4.5 billion shares are traded daily on Nasdaq.
- To be listed on Nasdaq, companies pay $47,000 to $163,000 in fees.
Nasdaq's 3,889 listed companies represent 10 broad sectors or industry groups. Most are in the fields of technology, consumer services, and health care.
While Nasdaq has plenty of giant corporations, such as PepsiCo., PayPal, and Amazon, its stocks tend to be more growth-oriented, and less blue-chip, than those on the NYSE. Nasdaq equities have a reputation for innovation, disruption - and volatility.
History of the Nasdaq
The Nasdaq was created in 1971 by the then-National Association of Securities Dealers (currently known as FINRA). Originally, it was just a quotation system - an electronic ticker of bid and ask prices - but it began adding trading and transactional systems.
- In 2002, Nasdaq became a fully independent, publicly traded company.
- In 2006, it became an SEC-registered national securities exchange.
- In 2007, it combined with the Scandinavian exchange group OMX to become the Nasdaq OMX group.
The Nasdaq does not have, and has never had, a physical trading floor. This became a problem for the exchange in 1995 as major companies such as Microsoft threatened to leave. No trading floor meant no physical presence, no opening bell ceremony, and, more importantly, no place for media networks to broadcast from during the trading day.
That problem was solved in 2000 with the construction of a massive 10-story tall tower at the corner of 43rd and Broadway in New York City, known as MarketSite, complete with video screens, a full television studio, and, yes, an opening bell ceremony. But the actual trading remains electronic.
It's a bit ironic: Nasdaq, which began as an all-electronic exchange, had to create a physical presence to gain credibility with Wall Street. But eventually, the NYSE and other older, established exchanges, discovered the need for an electronic component in order to stay competitive in a rapidly evolving marketplace.
The Nasdaq has two major indexes
Nasdaq isn't just a stock exchange. It also has two highly regarded indexes that track the performance of Nasdaq stocks daily:
- The Nasdaq Composite index tracks 2,790 Nasdaq securities - basically, everything but mutual funds, preferred stocks, and derivative securities. The Nasdaq is heavily weighted with technology stocks making it the 'de facto' bellwether for the tech sector.
- The smaller Nasdaq 100 index focuses on the largest, non-financial companies listed on the Nasdaq. Over half of them are in the tech sector.
Of the two, the Nasdaq Composite is the more influential. When commentators refer to "the Nasdaq closing up five points," it's usually the Composite they mean.
While the Composite index is more widely followed, the Nasdaq 100 is viewed by traders and investors interested in futures, options, and exchange-traded funds.
Calculating the Nasdaq indexes daily average
Both the Nasdaq Composite and Nasdaq 100 use the same modified market capitalization weighting method in which the closing price of each share (LSP) is multiplied by the total shares outstanding (TSO) for that company to arrive at that stock's market capitalization.
Share weights are calculated by dividing each security's market capitalization by the total capitalization of all index securities. Share weights for each stock are then multiplied by that stock's closing price and the total divided by an index divisor that accounts for market fluctuations such as stock splits, mergers, and other actions. The result is the Nasdaq average for that day.
Performance of the Nasdaq indexes
Nasdaq stocks have led the charge of the long-running bull market the US has seen in the 2010s. Its indexes have dramatically outperformed the S&P 500 (which tracks large-cap stocks), and the Dow Jones Industrial Index (the 30 largest US companies), two other stand-ins for the stock market overall.
The explanation? Since both Nasdaq indexes lean heavily into tech, consumer services, and health care - all top-performing industries in recent years.
How to invest in Nasdaq stocks
You can always try to duplicate the Nasdaq 100 or the Nasdaq Composite yourself, with individual stock purchases. But it probably would be more efficient to invest in an index fund that tracks the market's indexes. Many of them, naturally, trade on the Nasdaq.
- One of the most popular Nasdaq index funds is the Invesco Unit Investment Trust QQQ ETF (QQQ) which tracks the Nasdaq 100.
- To invest in the entire Nasdaq composite, Fidelity's Nasdaq Composite Index ETF (ONEQ) is a popular exchange-traded fund.
- If you prefer a mutual fund, the Fidelity Nasdaq Composite Index Fund (FNCMX) is a well-established vehicle.
In addition to being a stock market, the Nasdaq is a public company and you can invest in it, too. It trades as Nasdaq Inc. (NDAQ). But remember, you are investing in the company itself - not in the stocks listed on its exchange.
The financial takeaway
The Nasdaq made history by being the first electronic stock market. Today, as the second-largest major stock exchange, the stock exchange reflects market movement in tech and high growth companies. The Nasdaq, and its indexes, are highly watched by those who invest in those types of securities.
Investing in the Nasdaq or Nasdaq stocks is, by definition, riskier and more volatile than investing in the NYSE or DJIA, both of which rely on more established, less volatile stocks. But that also means potentially higher returns.
Weighted towards growth stocks, Nasdaq indexes have outperformed others. And investing in Nasdaq-tracking mutual funds or ETFs give investors an easy, efficient way to take advantage with less risk.