History of the Nasdaq
- Establishment
The Nasdaq was founded by the National Association of Securities Dealers in 1971 (currently known as FINRA). Initially, it was simply a quotation system — an electronic ticker of bid and ask prices — but trading and transactional systems were subsequently added.
- In 2002, Nasdaq became a publicly traded, totally independent company.
- In 2006, it became a national securities exchange registered with the SEC.
- It merged with the Scandinavian exchange group OMX in 2007 to form the Nasdaq OMX group.
There has never been a physical trading floor at the Nasdaq. This became a problem for the exchange in 1995 when Microsoft and other significant companies threatened to quit. Without a trading floor, there was no physical presence, no opening bell ceremony, and, most importantly, no place where media networks could broadcast during the trading day.
In 2000, this issue was resolved with the development of MarketSite, a gigantic 10-story building at the intersection of 43rd Street and Broadway in New York City, equipped with TV screens, a full television studio, and, yes, an opening bell ceremony. However, trade remains electronic.
Ironically, Nasdaq, which began as an electronic-only exchange, had to establish a physical presence in order to acquire Wall Street’s trust. But eventually, the NYSE and other older, more established exchanges realized they needed an electronic part to stay competitive in a market that was growing quickly.
Nasdaq introduced the world’s first electronic stock exchange, which eliminated the need for a trading floor and in-person trading, thereby transforming the financial markets. 50 years later, it is the largest technology stock exchange in the world and the second-largest exchange by market capitalisation. Not only is Nasdaq home to trillion-dollar corporations, but its moniker also represents innovation, growth, diversity, and worldwide appeal. The Nasdaq Composite Index most accurately represents the universe of Nasdaq Stock Market-listed companies (COMP).
- The dot-com bubble and bust
Between 1995 and 2005, the NASDAQ Composite experienced varied results during the dot-com boom and recession. The index reached 1,000 points for the first time in July 1995. It was followed by a continuous climb, which peaked in March of 2000 at 5,132.52.
In April 2000, the index fell to 3,227, and in October 2002, it reached its all-time low of 1,108.49. After the recession, the index slowly went back up until 2007/2008, when the Global Financial Crisis happened.
- Financial crisis
In the first quarter of 2007, the index attained its greatest intraday level since the dot-com crash, at 2,861.51 points. In September 2008, the index dropped roughly 200 points, falling below 2,000. In March 2009, the NASDAQ Composite reached a closing low of 1,265.52 points.
Subsequently, the index gradually rebounded with the assistance of the quantitative easing policy of the US Federal Reserve. In April 2015, the index broke a 15-year record of nearly 5,000 points.
What is Nasdaq?
The Nasdaq is the world’s second-largest stock exchange. Nasdaq, an abbreviation for the National Association of Securities Dealers Automated Quotation System, was founded in 1971.
The U.S.-based exchange is also the world’s first electronic stock market. Historically, stock exchanges were physical trading floors where prices were negotiated face-to-face. Nasdaq altered the operation of stock exchanges. It lacked trading floors and let investors purchase and sell equities through computerized systems. There are almost 3,700 companies included, including some of the world’s largest technology giants, such as Apple, Microsoft, Google, and Amazon. The exchange was set up by the National Association of Securities Dealers, and the U.S. Securities and Exchange Commission is its regulator.
When people use the term “Nasdaq” in colloquial speech, they are referring to the index and not the stock exchange. They are talking about the Nasdaq Composite Index, which is a number that shows how a part of the stock market is doing.
On the other hand, the Nasdaq 100 index analyzes the performance of the 100 largest and most actively traded stocks on the exchange.
What is the Nasdaq Composite Index?
The Nasdaq Composite is an index measuring the performance of more than 3,000 Nasdaq-listed securities. It is a popular stock market index, but it is notable for its high concentration of technology-related companies.The Nasdaq 100 is a smaller index that tracks the performance of the 100 largest non-financial businesses listed on the Nasdaq exchange by market capitalization. The initial acronym for Nasdaq was “National Association of Securities Dealers Automated Quotations.”
How Does It Work?
Since the index is market-cap-weighted, the total value of a stock’s shares determines its proportional impact on the index’s overall value. For instance, if a company had 50 million shares listed on the Nasdaq and each share was valued at $100, its market capitalization would be 50,000,000 x $100, or $5 billion.
The Nasdaq Composite Index is computed by adding the market capitalizations of all of its stocks and dividing them by a divisor. The divisor reduces the number and makes it more manageable.
As the prices of equities listed on the Nasdaq rise and fall, so does the value of the Nasdaq Composite Index. Because the index represents so many stocks, substantial moves in either direction by a single stock will not have a significant impact on the aggregate figure. Nonetheless, market conditions can occasionally lead a large number of Nasdaq stock values to move in the same general direction simultaneously, resulting in significant drops or spikes in the index. During the Great Recession, the index fell by 46.4% between August 22, 2008, and March 6, 2009.
Typically, the Nasdaq Composite appreciates with time. Despite sporadic economic downturns, the index increased by more than 90% over the five years ending in August 2022.As a result of its greater market exposure, the Nasdaq Composite has outperformed the S&P 500 during the past three years, during which the latter index has gained almost 65%.
Understanding The Nasdaq Composite Index
The Nasdaq Composite Index consists of all equity securities listed on the Nasdaq Stock Market, including tracking stocks, common stocks, ordinary shares, American depositary receipts (ADRs), units of real estate investment trusts (REITs), and publicly traded partnerships. Not eligible for inclusion are the securities of closed-end funds, exchange-traded funds (ETFs), preferred shares, rights, warrants, convertible debenture instruments, and other derivatives.
The Nasdaq Composite includes stocks of foreign-headquartered corporations, which is in contrast to the S&P 500 Index and the Dow Jones Industrial Average, which are the two most widely quoted market benchmarks.
The Nasdaq Composite Index is frequently regarded as a reliable indicator of the performance of the technology market because it comprises a large number of firms in the technology sector, particularly those that are young and developing rapidly. Approximately fifty percent of the index is made up of technology companies. Twenty percent of the index is made up of consumer service industries. And ten percent is made up of healthcare companies. The remaining companies operate in sectors such as utilities, oil, and communications.
The Nasdaq Weighting Method
The NASDAQ Composite Index calculates its value using the weighted market capitalization approach. The index’s value is the sum of the individual securities’ weights multiplied by the security’s last closing price. The total is then divided by an index divisor, which changes the value to a number that can be used in a report. The exchange continually computes and reports the index’s value every second. At 4:16 pm, after the market closes for the day, the NASDAQ’s closing price is reported. There are two versions of the NASDAQ Composite Index: price return and total return.
The price return is the return on the share price, excluding reinvested cash dividends but including non-cash dividends. On the ex-dividend date, the total return includes cash and non-cash dividends that were re-invested.
Criteria for the Nasdaq Composite Index
The following conditions must be met for a security to be considered for listing on the NASDAQ Composite:
- The security must be listed exclusively on the NASDAQ Stock Market. The only exception to this rule is for securities that were listed on a different US stock exchange before 2004 and have retained that listing.
- The security must be among American Depositary Receipts, ordinary shares, common stock, shares of beneficial interest, real estate investment trusts, limited partnership interests, or tracking stocks.
- If security doesn’t meet these requirements, it can’t be in the NASDAQ Composite and is taken out.
Categorization of the Nasdaq Composite Index
The NASDAQ Composite index classifies stocks into three market tiers based on the listing requirements they satisfy. The market segments consist of:
- Capital market
Capital market criteria are the least severe of the three market categories. It is an equity market for small-cap companies. Prior to its rebranding as the capital market, it was known as the “SmallCap” market.
- Global market
The worldwide market is composed of companies with a moderate market capitalization, and these companies must meet the liquidity and financial conditions set forth by NASDAQ. There are 1,450 stocks listed on the American and international stock exchanges.
- Global Select Market
In terms of finance, liquidity, and corporate governance, the global select market has the strictest standards. The majority of companies that meet these conditions have substantial market capitalizations. It consists of 1,200 U.S. and international stocks. The Listing Qualifications Department of the NASDAQ looks at these companies every October to decide if they can join this market.
Composition of the Nasdaq Composite Index
The Nasdaq Composite Index measures the performance of the majority of the securities listed on the Nasdaq exchange, excluding mutual funds, preferred stocks, and derivatives. Because there are so many tech stocks on the Nasdaq, it is a leading indicator for the tech market.
- Sector Wise
| Sector | Percentage |
| Technology | 51% |
| Consumer Services | 8.7% |
| Health Care | 8.6% |
| Consumer Goods | 8.7% |
| Financials | 7.6% |
| Industrials | 5.5% |
| Telecommunication | 1.1% |
| Oil and Gas | 1% |
| Utilities | 1% |
| Basic Materials | 1% |
- Top Companies (as per market capitalization, data as on October 17th, 2022)
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- Apple, Inc. (AAPL)
- Microsoft Corporation (MSFT)
- Class C Alphabet (GOOG)
- Alphabet Class A (GOOGL)
- AMZN stands for Amazon.com, Inc.
- Tesla Inc. (NASDAQ:TSLA)
- Nvidia Corporation (NVDA)
- Pepsico Inc. (PEP)
- Costco Wholesale (Cost)
- Broadcom, Inc. (AVGO)
Market Performance of the Nasdaq Composite Index
According to Morningstar, the Nasdaq Composite Index generated an annualized return of 13 % until October 16, 2022. The Nasdaq Composite’s 9.1% decrease in Q1 2022 was its worst since the 14.2% decline in Q1 2020, when the COVID-19 pandemic occurred. The Nasdaq’s 12% decrease in April 2022 was its worst performance since October 2008, when it dropped 17.4% during the height of the global financial crisis. In mid-March of 2022, the Nasdaq Composite met the conventional definition of a bear market by falling more than 20% from its peak on January 3, 2022. The index then had a strong relief rally that cut its losses by about half by the beginning of April. The next month, however, it went in the opposite direction.
Since the Nasdaq Composite is dominated by the historically volatile technology sector, index performance is typically more volatile than that of the S&P 500 or Dow Industrials.
Who Should Invest in the Nasdaq Composite Index?
Investing in stock market indexes is a good choice if you lack the time, interest, or knowledge to research and pick specific stocks to invest in or if you lack the skills to evaluate stocks properly.In fact, billionaire investor Warren Buffett, widely regarded as the most successful stock investor of all time, has stated that index funds are the best investment option for most Americans. If you have the time and inclination to invest in individual equities, we encourage you to do so. But if you don’t, there’s nothing wrong with automating your portfolio with index funds.
Due to its inclusion of every Nasdaq-listed common company, the Nasdaq Composite Index provides investors with significant exposure to tech heavyweights of today, such as Apple, Microsoft, and Amazon, as well as some exposure to tech heavyweights of tomorrow. Therefore, the Nasdaq Composite Index could be an excellent investment choice if you are not yet comfortable selecting specific stocks or if you desire broad exposure to the technology industry.
The Nasdaq 100 index
The NASDAQ 100 Index is one of the most prominent large-cap growth indexes in the world. It comprises the 100 largest non-financial local and international companies listed on the NASDAQ stock exchange. Based on their market capitalization, the 100 companies are ranked. The index is home to some of the most unique and innovative companies in the world, including Apple, Google, Tesla, etc.
With the exception of the financial sector, which consists of commercial and investment banks, the index includes companies from a number of industries. Among them are the retail, biotechnology, industrial technology, and healthcare industries.
Conclusion
The growth of the most successful companies with Nasdaq-listed shares, like Microsoft, Apple, and Alphabet, led to the rise in popularity of the Nasdaq Composite Index. The downside of such long-term success in a market capitalization-based index is that the Nasdaq Composite is extremely top-heavy. The top five companies (and six stocks, including both traded classes of Alphabet’s shares) account for more than forty percent of the index weight of the Nasdaq Composite.
In addition, the high-growth stocks that dominate the index tend to be more economically sensitive and thus more volatile. When the market performs well, the Nasdaq Composite can stand out: despite a tough March, it gained 43.6% in 2020, following a 35.2% increase in 2019. In adverse conditions, the company’s 2008 loss of 40.5% is equivalent to the first four months of 2022.
FAQs
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How to invest in US stocks from India?
You can get started by investing via Kuvera to manage your international portfolio.
Step 1: Open the Kuvera app or website.
- On Kuvera, go to Invest and then select US Stocks.
Step 2: Select the ‘Start Investing’ Option
- You will be directed to two options. You can either create a new portfolio with a new Vested US investing account or link an existing account.
Step 3: Finish all KYC documentation.
- Before you open an account, it’s mandatory to complete your verification process by filling in the KYC form. Upload your PAN card for address proof and pay the account opening fee. Once done, you will be able to track the account opening statement from the portfolio section.
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What are the US stock market timings?
The US stock markets will be open from 9:30 AM to 4:00 PM EST, or 7:00 PM to 1:30 PM IST.
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