What Is the Nasdaq?
The Nasdaq is the largest electronic, fully automated stock exchange in the world, meaning that the exchange has no trading floors or in-person trading. It is considered the preferred exchange for technology- and growth-oriented companies that are looking to raise equity capital and maintain a strong secondary market — where shareholders trade investments of stocks and securities that they already own.
Today, the Nasdaq lists about 3,500 companies and has an aggregate market value of $22 trillion. This value is second only to the New York Stock Exchange (NYSE), which boasts an aggregate market value of $26 trillion. Some of the better-known stocks that trade on the Nasdaq include Alphabet Inc. (GOOG and GOOGL), Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Intel Corporation (INTC), Meta Platforms Inc. (FB), Microsoft Corporation (MSFT), Starbucks Corporation (SBUX) and Tesla Inc. (TSLA).
Originally, the exchange was marketed in all capital letters — NASDAQ. The acronym stands for the National Association of Securities Dealers Automated Quotations.
How Does the Nasdaq Work?
The Nasdaq functions as a dealer exchange, which means that its participants trade via a network of companies or individuals who execute the actual purchases and sales of securities. These companies or individuals are known as market makers. A dealer exchange such as the Nasdaq is different from an auction exchange like the NYSE, where buyers and sellers trade with each other through a broker.
Since its inception, the Nasdaq has operated electronically. As a result, it does not have, and never has had, a physical trading floor.
Even though it lacks a physical trading floor, the owner of the Nasdaq Stock Market, Nasdaq OMX Group Inc., maintains a 10-story tower in New York City that is known as the Nasdaq MarketSite. The primary purpose of the facility is to foster a media-friendly operation — complete with an opening bell ceremony and a full television studio where media networks can broadcast throughout the trading day.
Nasdaq Trading Hours
The Nasdaq is open for trading between 9:30 a.m. and 4 p.m. EST. Additionally, the Nasdaq hosts pre-market and post-market hours to allow traders to react to news reports and economic indicators, or certain statistics about the economy, that are received outside of normal trading hours. Pre-market hours run from 4 a.m. to 9:30 a.m., while post-market hours are from 4 p.m. to 8 p.m.
Listing Requirements for the Nasdaq
For a company to list its stock on the Nasdaq exchange, it must satisfy the following requirements:
- Achievement of minimum levels of acceptability regarding financial condition, liquidity and corporate governance
- Registration with the U.S. Securities Exchange Commission (SEC)
- At least three market makers to represent the stock on the exchange
Once an application is submitted, it may take four to six weeks for the listing to be approved. Once approved, listings are assigned to one of three tiers based on their market capitalization (the share price multiplied by the number of shares outstanding). The three tiers are the Nasdaq Global Select Market, the Nasdaq Global Market and the Nasdaq Capital Market.
The Global Select Market tier consists of large company stocks, the Global Market tier encompasses mid-sized companies and the Capital Market tier is comprised of small companies. All three tiers have a mix of domestic and international firms.
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Nasdaq History
Introduced in 1971, the Nasdaq was established to electronically enhance the structure of traditional stock exchanges, which consisted of live traders bustling around a crowded trading floor to collect and execute buy and sell orders. However, the original Nasdaq didn’t actually handle trades. Rather, it provided an automated information-gathering solution to facilitate trades that were conducted elsewhere.
In its early days, the Nasdaq was owned by the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA). The Nasdaq separated from the NASD and started operating as a national securities exchange in 2006.
In 2007, the Nasdaq merged with OMX AB, a Stockholm-based operator of Nordic and Baltic regional exchanges, and became the Nasdaq OMX Group Inc. The new company, which was renamed Nasdaq Inc. in 2015, operates multiple exchanges, a clearinghouse and five central securities depositories in the U.S. and Europe.
In addition to stocks, Nasdaq-operated exchanges facilitate trades in fixed-income securities, derivatives and commodities.
Today, Nasdaq Inc. does far more than just operate its securities exchanges. The company also develops and maintains technology solutions, furnishes investment intelligence and provides investment relations services. Trading on the Nasdaq under the symbol NDAQ, the company earns its revenue from a wide variety of clients, including financial institutions, brokers, asset managers and institutional investors.
Popular Nasdaq Stock Indexes
The Nasdaq is the source reference for the following stock indexes, which are both closely watched:
- Nasdaq Composite Index
- The Nasdaq Composite Index tracks the performance of over 2,500 technology-related companies listed on the Nasdaq Stock Market. With representation of about 80% of the companies listed on the Nasdaq, it is a very good indicator of the overall performance of the exchange.
It utilizes a capitalization-weighted methodology to determine proportion sizes. As a result, the companies with the largest market capitalizations have the greatest influence over the performance of the index.
- Nasdaq-100 Index
- The Nasdaq-100 Index tracks the performance of the largest non-financial companies listed on the Nasdaq Stock Market. Like the Nasdaq Composite Index, it uses a capitalization-weighted methodology to determine proportion sizes.
Of the two indexes, the Nasdaq Composite is the more widely followed and broadly informative. Financial news reports frequently reference the index when describing how the Nasdaq faired for the day. The Nasdaq-100 has a smaller following, but it’s still an important index for traders and investors who are focused on massive technology-oriented companies.
How Are These Indexes Used?
As outlined below, there are three interrelated ways a Nasdaq index can be used.
- Market Monitoring
- The most common use of a Nasdaq index is to monitor market performance and gauge economic sentiment, particularly in the technology space.
- Performance Benchmarking
- Beyond just monitoring the market in a broad sense, many investors use Nasdaq indexes to gauge the performance of specific investments. For example, an investor in an actively managed technology fund can look at the Nasdaq Composite Index to evaluate whether the fund managers are performing well as compared to the broader market. A favorable relative performance indicates good decision-making and timing on behalf of the fund managers, while underperformance indicates suboptimal trading.
- Index-linked Investing
- Arguably, the application that could be most beneficial to your personal finance situation is index-linked investing. Also known as passive investing, this is a widely popular and low-cost method of replicating the returns of the Nasdaq, rather than trying to outperform it.
Nasdaq Historical Prices and All-Time Highs
On April 19, 2022, the closing price of the Nasdaq Composite Index was 13,619.66, which was 16% off the Nasdaq’s all-time high of 16,212.23 that was reached in late November 2021.
Since its inception, the Nasdaq Composite Index has generated a cumulative return of 795.64%, according to data from Nasdaq Inc. referenced in April 2022. This reflects a 5-year return of 204.85% and a 10-year return of 570.34%.
While these returns are very impressive, investing in the Nasdaq Composite Index comes with an elevated level of risk. Many of the technology companies listed in the index are highly cyclical and relatively immature, which can lead to a high degree of volatility. If you do decide to invest in the Nasdaq Composite Index, be sure to adopt a long-term stance.
