The National Association of Securities Dealers Automated Quotations, commonly known as the Nasdaq, is the second-largest securities and stock exchange in the world. Unlike the New York Stock Exchange and its physical trading floor, the Nasdaq is an all-electronic exchange — the largest, actually — and all of its trades happen electronically.
Today, more than 4,000 companies are traded on the Nasdaq’s two indexes: the Nasdaq Composite and the Nasdaq 100.
About the Nasdaq
When the Nasdaq was created in 1971, it didn’t actually trade anything: it just gave automated quotations. It started over-the-counter trading a few years later, and the fact that everything was automated allowed for cost savings that democratized investing.
The Nasdaq has always been heavily weighted toward tech and growth-oriented businesses. In fact, it was the first exchange to allow companies to offer an Initial Public Offering. Apple, for example, launched its IPO and began trading on the Nasdaq in 1980. The Nasdaq was also the first exchange to have a website, the first to store records in a cloud and the first to sell its technology to other exchanges.
Started in 1985, the Nasdaq 100 is an index of the 100 largest, non-financial companies listed with the Nasdaq. By contrast, the Nasdaq Composite index tracks almost 3,000 companies, making it larger than any rival index. Since tech stocks make up so much of the Composite, investors look to it to see how tech companies are doing. Usually, when you hear “the Nasdaq” being talked about on the news, they’re referring to the Nasdaq Composite. The Nasdaq 100 is followed by those interested in futures, options and ETFs.
How the Nasdaq Works
To be listed on the Nasdaq Composite or the Nasdaq 100, companies must:
- Meet requirements based on capital, finances, corporate governance and liquidity.
- Register with the U.S. Securities and Exchange Commission.
- Have at least three market tiers.
Once a company applies for an IPO, it takes four to six weeks to be approved.
While the Nasdaq was created so stocks could be exchanged electronically, in an ironic twist of fate, this became a problem in 1995 when Microsoft threatened to leave the exchange. Without a trading floor, there was nowhere for the media to broadcast that event or daily reporting on market activity. To remedy that, the Nasdaq now has MarketSite. It isn’t a trading floor, but it provides a television studio and it even has an opening bell ceremony.
The events of 2020 upended many industries, but because the Nasdaq is heavily weighted toward tech stocks, it weathered the worst of the pandemic and actually gained 43.2% growth during the past year. The Dow Jones Industrial Average and the S&P 500 also gained ground in 2020, but not nearly as much as the Nasdaq did. Tech companies such as Alphabet, the parent company of Google, along with Facebook, Amazon, Netflix and Apple had a strong year due to the pandemic forcing people to work from home, forcing them to also increase the amount of shopping done online and subscribe to streaming services.
Historically, the Nasdaq has had a reputation of being more volatile than other indexes due to the prevalence of tech and growth-oriented companies. But its performance this past year seems to contradict this assumption.
Nasdaq Market Tiers
A company will be listed on the Nasdaq in one of three market tiers and its placement is based on the following criteria:
- Nasdaq Global Select Market: Consists of stocks from U.S. and international companies, weighted by market capitalization. It has the highest initial listing standards of any exchange in the world. Being listed here is considered a badge of honor.
- Nasdaq Global Market: Consists of companies with overall global leadership and international reach.
- Nasdaq Capital Market: Consists of companies focused on raising capital, with a smaller market capitalization. It used to be called the SmallCap Market.
You can invest in any stock on the Nasdaq or in an index that replicates the Nasdaq 100. You can also invest in Nasdaq itself, as it is a public company and it trades on its very own exchange. If you’re leery about risk, consider investing in mutual funds or ETFs. These mitigate risk while still investing in the market.