What is Nasdaq?
Nasdaq Stock Market is a global electronic marketplace for buying and selling securities on an automatic, transparent and speedy electronic network. It trades through a computer system rather than in a physical trading floor for the traders to trade directly between them. It is an American stock exchange located in the Financial District of Lower Manhattan in New York City.
NASDAQ is owned by the company Nasdaq. Inc. and ranked second on the list of stock exchanges as per market capitalisation of shares traded. The first rank goes to the New York Stock Exchange. Nasdaq-National Association of Securities Dealers Automated Quotations, was founded in 1971 by the National Association of Securities Dealers (NASD) to avoid inefficient trading and delays. Nasdaq. Inc. company also owns the Nasdaq Nordic stock market network in addition to other exchanges. The exchange has more than 3,100 companies listed. They are the highest trade volume companies in the US market, valued more than US$14 trillion in total.
What is Nasdaq known for?
Nasdaq currently is the largest electronic stock market, and it is most well-known for its high-tech stocks. But it also has a variety of companies listed such as capital goods, healthcare, consumer durables and nondurables, energy, public utilities, finance and transportation.
Nasdaq boasts of having some of the largest blue-chip companies in the world and attracts high growth-oriented companies. Its stocks are known to be volatile than those listed on other exchanges. Apart from listed stocks, Nasdaq also trades in over the counter (OTC) stocks. The ticker symbols for the listed companies’ stocks on the Nasdaq have four or five letters.
The Nasdaq Composite index was initially termed as Nasdaq. It included all the stocks listed on Nasdaq stock market and also many stocks listed on Dow Jones Industrial Average and S&P 500 Index. The index has more than 3,000 stocks listed on it which include the world’s largest technology and biotech giants like Microsoft, Apple, Amazon, Alphabet, Facebook, Gilead Sciences, Tesla and Intel.
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Companies have to meet certain criteria to get listed on the NASDAQ National Market.
The small companies which cannot meet the criteria can get listed on NASDAQ Small Caps Market. Nasdaq changes the companies as the eligibility of the companies keeps changing.
What are different Nasdaq indexes?
Nasdaq uses an index to list its stocks like any other stock exchange. The index delivers stock performance snapshots. The New York Stock Exchange (NYSE) has the Dow Jones Industrial Average (DJIA) as its primary index; it tracks the stock price of 30 big companies. Nasdaq Composite and the Nasdaq 100 are two indices of Nasdaq. Nasdaq Composite measures the performance of more than 3,100 listed companies’ stocks trading daily on Nasdaq.
Nasdaq 100 is a modified capitalisation-weighted index. This index has listed companies from various sectors, but the majority is from the technology industry. Depending on their market value, Nasdaq adds or removes the companies from its index Nasdaq 100.
Both the NASDAQ Composite and the NASDAQ 100 indexes have listed companies from the United States as well as global companies. On the other hand, Dow Jones Industrial Average index does not include companies outside of the US.
Nasdaq performance in the past has been groundbreaking and extraordinary. One of its highly regarded accomplishments is that Nasdaq was the first-ever stock exchange for offering electronic trading. It was the first to launch a website and stored all the records in the cloud. Interestingly, Nasdaq also sold its technology to other stock exchanges. Nasdaq invented the modern Initial Public Offering (IPO) as it listed venture-capital-backed companies.
Initially, it merged with the American Stock Exchange. It formed the Nasdaq-AMEX Market Group, later on, the AMEX index was acquired by NYSE Euronext, and the entire data was integrated into NYSE. In 2007 Nasdaq acquired OMX which is a Swedish-Finnish financial company. Followed by which Nasdaq changed its name to NASDAQ OMX Group. NASDAQ OMX Group bought the Boston Stock Exchange and also the Philadelphia Stock Exchange which was the oldest stock exchange in the US.
How to trade on Nasdaq?
Though the New York Stock Exchange is the largest exchange by market capitalisation, Nasdaq is the largest by trading volume due to its electronic quote mechanism. Nasdaq is a dealer’s market where the public buys and sells stocks with the help of the market maker (a registered broker/dealer). The market maker provides the buy and sell quotes and takes the position in those stocks.
NYSE works differently as the buyers and sellers can trade directly with each other, and a specialist allows the trade. On Nasdaq, the market maker owns inventory and trade stocks in his/her capacity.
Good read: Why NASDAQ Composite index plunged 5%?
What is a Market Index? A market index could be defined as a representation of a security market, market segment, or asset class of freely tradable market instruments. A market index is primarily made up of constituent marketable securities and is re-calculated on a daily basis. There are basically two forms or variations of the same market index, i.e., one version based upon the price return known as a price return index, and one version based upon total return know as a total return index. Why Do We Need A market Index? Ideally, a large number of market participants including investors and institutional funds gather and analyse vast amounts of information about security markets; however, doing so could be a very troublesome and tiring task as the work is both time consuming and data-intensive. Thus, a large number of market participants prefer to use a single measure that could represent and consolidate a plethora of information while reflecting the performance of an entire security market of interest. This is where market indexes play a major role as they are often a simple measure to reflect the performance of any underlying market of interest. For example, S&P500, NASDAQ, are believed to reflect the true performance and picture of the U.S. stock market in particular and U.S. economy in general. Likewise, many indexes such as S&P/ASX 200 is believed to reflect the performance of the Australian stock market and so on. Index Construction Constructing a market index is almost similar to constructing a portfolio of securities as the construction of an index requires: Target Market and Security Selection The first and the primary decision in constructing an index is to identify the target market and select financial instruments which reflect the true nature of the underlying market. The target market, which determines the investment universe and securities available for inclusion, could be based on any asset class, i.e., equities, fixed income, commodities, real estates or on any geographic region. Once the target market is identified, the next step is to select securities which represent the true nature of the target market and decide on the number of securities to be included in the index. Ideally, a market index could be of all securities in the target market or a representative sample of the target market. For example, some indexes such as FTSE 100, S&P 500, S&P/ASX 200, fix the number of stocks to be included in the index while indexes like Tokyo Stock Price Index (or TOPIX) select and represents all of the largest stocks, known as the First Selection. For such indexes, the included securities must meet some basic parameters like pre-decided market capitalisation, the number of shares outstanding, to remain in the index. Weight Allocation The weight allocation varies considerably among indexes depending upon the method of weight allocation, and it basically decides on how much weight each security in an index carry. The method of weight allocation is one of the most important parts that investors need to understand thoroughly as it has a substantial impact on the value of an index. Some of the most widely-used weight allocation methods are as below: Price Weighting This method was originally used by Charles Dow to construct the Dow Jones Industrial Average (or DJIA) and is one of the simplest methods. The price weight method determines the weight of each individual security of an index by dividing the price of the security by the sum of prices of all securities. In simple terms, each security gets the weight of its price in proportional to the total price of the index. The primary advantage of this method is its simplicity; however, the method leads to arbitrary weights for each security as the method is highly sensitive to some market actions such as stock split. Equal Weighting As the name suggests, this method assigns equal weight to all securities in an index. Just like equal weighting, the major advantage of this method is its simplicity; however, this method tends to underrepresent the value of large securities and overrepresent the value of smaller securities. Market-Capitalisation Weighting Market-Capitalisation method weight each constituent by dividing its market capitalisation with the total market capitalisation of the index, i.e., the sum of the market capitalisation of each constituent. The market capitalisation could be determined by multiplying the number of outstanding shares of the security with its market price per share. Rebalancing and Reconstitution Rebalancing of a market index could be defined as the adjustment to the weights of the constituent securities. Depending upon the method of weighting an index, the weight of each individual security tends to change due to market actions or price appreciation and deprecation, in similar fashion to a stock portfolio requires scheduled rebalancing. A majority of market indexes are rebalanced on a daily basis as price tends to often change regularly. On the other hand, reconstitution could be ideally defined as the process to change the constituent of a market index. As suggested above, many market indexes such as TOPIX require each constituent security to meet some parameters for the inclusion; however, due to market dynamics, various securities tend to get added or removed from an index time to time. Uses of Market Index Originally, market indexes were created to provide a sense to investors on how a security market performed on a given day. However, with the development of the modern finance theory and growing numbers of indexes in the market, uses of market indexes have been expanded significantly. Some of the major uses of market indexes are as below: To Gauge the market sentiment A market index is usually a collection of the opinion of market participants; thus, they reflect the attitude and behaviour of the market participants, making them one of most widely used tool to gauge the market sentiment. To measure and model the risk and return profile of a market Market indexes could serve as a proxy for systematic risk in many popular models such as the Capital Asset Pricing Model (or CAPM). The market portfolio, which represents the systematic risk of the market often uses a market index, as a proxy of the market portfolio as including the whole population or all stocks in the model could lead to wrong output, and it could be very costly and cost consuming. Serves as a Performance Benchmark Market indexes often serve as a performance benchmark for individual investors and especially large investors such as mutual funds, ETFs, pension funds, and large banks.
Amongst the Nasdaq's U.S. market tiers meant for early stage companies that have relatively low levels of market capitalization is the Nasdaq Capital Market, wherein the listed low market capitalisation companies bear the added advantage of less stringent listing requirements as compared to the two other Nasdaq market tiers, which focus on larger companies with higher market capitalization.
NASDAQ Global Select Market Composite comprises of 1,200 stocks and is a market capitalization-weighted index containing U.S.-based as well as global stocks that are consistent with Nasdaq's strict financial and liquidity requirements and corporate governance guidelines.
Being the leading electronic-driven stock market with listings of more than 5000 companies, Nasdaq stock market is constituted by two distinct markets, namely, the Nasdaq National Market (which facilitates the trade of large and active securities) and the Nasdaq Smallcap Market (that trades developing growth companies).