Defining the NASDAQ (National Association of Securities Dealers Automatic Quotation System)
Nasdaq is a global electronic exchange where stocks can be bought and sold. Nasdaq began as a division of the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority. Its name was originally an abbreviation for "National Association of Securities Dealers Automated Quotations". The Securities and Exchange Commission (SEC) pushed NASD to automate the market for securities not listed on an exchange, which led to the creation of Nasdaq. The first electronic trading system was the outcome. The Nasdaq began operations on February 8, 1971.
Understanding the Nasdaq
The Nasdaq Composite, an index comprising over 3,700 stocks traded on the Nasdaq market and containing tech heavyweights Apple Inc. (AAPL), Microsoft (MSFT), Google parent Alphabet (GOOG, GOOGL), Meta Platforms Inc. (META), Amazon.com Inc. (AMZN), and Tesla Inc., is also referred to as "Nasdaq" (TSLA).
In 2006, Nasdaq started operating as a national securities exchange after formally severing ties with the NASD. It merged with the group of Scandinavian exchanges known as OMX in 2008 to become the Nasdaq OMX Group. 3 In 2015, the business changed its name to Nasdaq Inc.
The Nasdaq, which has its headquarters in New York, runs 29 markets that allow traders in the United States, Canada, Scandinavia, and the Baltics to transact in stocks, derivatives, fixed income, and commodities. The business also manages five central securities depositories in Europe and the United States as well as a clearinghouse. 5 In 50 different nations, 100 exchanges use its trading system. Since 2008, Nasdaq Inc. has been a component of the S&P 500 Index and is traded on the Nasdaq stock market under the ticker NDAQ.
How does the Nasdaq work?
In the past, traders gathered in stock exchange buildings to buy and sell assets. Prices would be negotiated face-to-face by market participants on a physical trading floor where transactions would take place. The Nasdaq was drastically different when it was first established in 1971. There was no trading floor and no in-person trading; instead, all transactions happened over a network of computer computers.
The majority of securities exchanges now operate entirely electronically, and very few still maintain any form of the physical trading floor. One of the less well-known effects of the Covid-19 outbreak has been the closure of the few physical trading floors that were still in operation.
But regardless of whether the buying and selling occur in real life or online, it is made possible through a network of investment companies known as market makers. When you opt to purchase shares of stock, these companies execute the trades you order by holding and exchanging the individual securities listed on any stock market. Over 2 billion shares, with a market value of nearly $12 trillion, trade on Nasdaq's electronic exchange every day, the company claims.
The Tech-Heavy Nasdaq
The majority of the companies that trade on the Nasdaq are typically in the technology sector. According to Jason Steeno, president of CoreCap Advisors Investments, part of that is because the Nasdaq has less stringent listing rules, making it a target for startups.
"An investor would often look to those listed on the Nasdaq for high-tech companies to add to their portfolio," he explains. "Listing standards on the Nasdaq are typically less stringent for younger companies, such as those that also provide innovative or developing technology, removing possible barriers for younger companies looking to go public." #
Requirements to be listed on the Nasdaq
There are restrictions on which corporations can list and trade their stocks on each stock exchange. Companies must generally register with the U.S. Securities and Exchange Commission (SEC) and adhere to additional exchange regulations, such as meeting certain financial thresholds.
Each of the three tiers on Nasdaq has its own set of requirements. But generally, businesses must:
- Follow company management, financial, and liquidity standards; register with the Securities Exchange Commission (SEC).
- Possess at least three market makers who are ready to help with the buying and selling of its security; the average price of Nasdaq equities is 14.
- Companies may also soon be required to employ at least one woman and one individual who is neither White nor heterosexual.
The key characteristics and requirements for each of Nasdaq's three categories. Please go to Nasdaq's guide for further details because each one provides numerous options for satisfying each particular set of requirements.
Nasdaq Global Select Market
The Nasdaq Global Select Market has the strictest initial financial and liquidity criteria. Being a part of the Nasdaq Global Select Market is a sign of the company's global status because of the stringent requirements to be included in this tier. Companies must have at least 1,250,000 publicly traded shares and trade at least $4 a share, as well as meet criteria for earnings, capitalization, or assets.
Nasdaq Global Market
Companies that trade on the Nasdaq Global Market can sell their goods or services worldwide. The qualifications for the Global Market are more demanding than those for the Nasdaq Capital Market but less demanding than those for the Global Select Market. With some exceptions, Nasdaq Global Market firms must meet requirements based on income, equity, market value, or total assets/revenue, have at least 1,100,000 shares that are publicly listed, and trade at least $4 per share.
Nasdaq Capital Market
Companies on the Nasdaq Capital Market are often younger than other companies, having less liquidity and income, as they are concentrated on raising capital. Nevertheless, subject to certain limitations, they must satisfy equity, market value, or net income requirements, have at least 1,000,000 publicly listed shares, and trade for at least $4.
Trading hours of the Nasdaq
The Nasdaq Stock Market typically operates Monday through Friday, with Saturday and Sunday being off-limits. Trading on the Nasdaq starts at 9:30 a.m. Eastern time. The regular session ends at 4 p.m. Eastern time after six and a half hours have passed after the closing bell rang.
The Nasdaq offers traders the possibility to take part in special sessions before and after the regular session, though. Each workday, premarket trading takes place from 4 a.m. until 9:30 a.m. Eastern time. Monday through Friday, after-market hours are from 4 p.m. to 8 p.m. Eastern time.
The Nasdaq closes for the following holidays:
| Holiday | 2024 Date |
|---|---|
| New Year’s Day | Monday, Jan. 1 |
| Martin Luther King Jr. Day | Monday, Jan. 15 |
| Presidents’ Day | Monday, Feb. 19 |
| Good Friday | Friday, March 29 |
| Memorial Day | Monday, May 27 |
| Juneteenth National Independence Day | Wednesday, June 19 |
| Independence Day | Thursday, July 4 |
| Labor Day | Monday, Sept. 2 |
| Thanksgiving Day | Thursday, Nov. 28 |
| Christmas Day | Wednesday, Dec. 25 |
Additionally, the Nasdaq shuts early, at 1 p.m. Eastern time, on the Friday following Thanksgiving and, if Christmas Eve falls on a weekday and the standard Christmas holiday is recognized on December 25, on Christmas Eve.
The second-largest stock exchange in the world, the Nasdaq Stock Market, is essential for integrating technology into trading. For businesses looking to list their stocks on a U.S. stock market, the Nasdaq offers an alternative to the New York Stock Exchange. The Nasdaq should continue to benefit investors for many years to come because of its long history of innovation.
Records to remember
Adena Friedman, the Chief Operating Officer, was elevated to the position of CEO in November 2016, making her the first American woman to lead a significant exchange.
Board Diversity Disclosure Rule
Nasdaq announced a new regulation on Dec. 1, 2020, requiring companies listed on the exchange to disclose the diversity of their board of directors. A minimum of one female director and one who belongs to an underrepresented group or who identifies as LGBTQ+ must serve on a company's board of directors, or the company must publicly state why it hasn't done so. On August 6, 2021, the SEC approved the board diversity disclosure regulation.
Financial Performance
Customers who use Nasdaq include financial institutions, brokers, institutional investors, and businesses. The majority of Nasdaq's income comes from the following fees:
- Market services provide investors with access to a range of markets.
- For financial institutions, brokers, and asset managers, investment intelligence includes data, indices, and investment analytics.
- Technology for the market, such as trading and settlement systems and security measures against financial crime
- Listing fees and investment relations services are examples of corporate services.
Nasdaq announced a net profit of $283 million for the first quarter of 2022 that ended on March 31 on revenues of $1.54 billion and revenue-less transaction-based expenses of $892 million. The business also announced plans to seek SEC and shareholder permission for a 3-to-1 stock split to be completed in the third quarter of 2022, increasing the quarterly dividend by 11% to $0.60 per share.
Nasdaq Composite Index Performance
On November 19, 2021, the Nasdaq Composite reached a new high of 16,057.44. From that point until April 2022, the index fell by more than 23%. The Nasdaq Composite experienced its biggest monthly decrease in April 2022, losing 13.3%, since the index dropped 17.4% in October 2008 as a result of the world financial crisis.
Nasdaq’s history: Going back in time
There are two ways to use the word "Nasdaq," so be aware of that.
- “How’s the Nasdaq doing?”That is referring to the Nasdaq Composite stock index, which tracks stock movements throughout the tech sector (more on that below).
- The Nasdaq Exchangeis the first electronic trading floor in the world where companies, frequently tech companies, list their shares. Over 3,000 of these companies are then tracked on the Nasdaq Composite index to provide an overview of the health of the technology industry (more on that here).
The National Association of Securities Dealers established the first electronic stock exchange on February 7, 1971, which is currently the second-largest stock exchange in the world by market capitalization. It first permitted automatic quotations before starting to offer stock trading. The goal was to make trading as computerized and effective as possible by incorporating new technology, which at the time was computers.
The New York Stock Exchange ("NYSE") and Nasdaq rapidly became rivals as a result of Nasdaq's increasing emphasis on technology as a differentiator. The first stock exchange to provide internet trading was Nasdaq. Additionally, Nasdaq is entirely electronic as opposed to the NYSE, which has a trading floor with individuals placing orders from one another. Nasdaq's dedication to technology drew a variety of tech companies, including Microsoft and Oracle, as they sought to list shares publicly in an IPO.
Through alliances and acquisitions, Nasdaq kept growing its stock market. For instance, in 1992 it bought the Philadelphia Stock Exchange and established its first "intercontinental connectivity" with the London Stock Exchange. In order to run a nationwide stock exchange, Nasdaq split from its original founding partner, NASD, in 2006. A year later, it joined the OMX Exchange, which is situated in Scandinavia.
The NYSE has intensified its marketing to tech companies in recent years as the US economy and stock market have become increasingly technology-focused. Recent high-profile IPOs of tech companies like Twitter, Alibaba, and Uber have demonstrated that the Nasdaq may no longer be the only place to list shares.
Defining the Nasdaq Composite
You can't always tell how the market is going by looking at a few stocks. Stock indices are algorithms that provide a single figure to gauge the overall market or a particular industry, giving you a sense of how it's doing in a single snapshot, and they assist with that. The stock prices of the companies that make up the index are used to calculate it.
The Nasdaq Composite is frequently consulted by investors who are interested in the state of the tech industry. A chosen 2,500+ companies are included in this Nasdaq stock index, despite the fact that many more have listed their shares on the Nasdaq Exchange. A few important characteristics of the Nasdaq Composite include:
It’s tech-heavy:
The Nasdaq has a significant tech influence because a sizable number of the companies listed on the Nasdaq exchange are included in the index, and the majority of companies listed on the Nasdaq exchange are tech companies.
It’s weighted:
The index weights the equities to reflect their various sizes (their size is their value by market capitalization). The index utilizes a mechanism to take into consideration the fact that internet giant Amazon's valuation is far higher than that of pioneering tech camera company GoPro.
It’s international:
The Nasdaq Composite index includes companies from around the world, unlike other indices (such as the S&P 500 or the Dow).
It extends beyond stocks:
The index comprises a range of tech-related instruments, including, to name a few, American Depository Receipts (ADRs), exchange-traded funds, and real estate investment trusts (REITs), which are tradeable real estate investments.
How do you calculate the Nasdaq Composite?
The Nasdaq Composite is determined throughout the day using prices that are evaluated once per second. The final Nasdaq Composite is determined and announced at 4:16 pm EST at the conclusion of the trading day (markets close trading at 4 pm EST).
Greetings from "The Methodology" The method used by Nasdaq to determine the final Nasdaq Composite index number is (proudly) mathematical. Keep in mind that 2,500+ stock values must be combined to get a single stock index number. And there are 3 essential components to the process: The "index divisor," the "last price," and the most recent price of the security on the list are all weighted numbers.
Here's what happens. To ensure that a stock's influence on the final figure matches to the size of the company, Nasdaq first utilizes a method of weighting a stock by its market capitalization. The security's most recent price is then multiplied by all of the share weights of each security concerned. Then, Nasdaq chooses an "index divisor" from the sum of those numbers. The Nasdaq Composite Index is now yours.
The Nasdaq Composite is made up of a variety of businesses in addition to technology. From the most to the least represented sector, below is how each industry is represented within the Nasdaq Composite as of May 2018:
- Tech (46.40%)
- Consumer Services (20.16%)
- Healthcare (10.86%)
- Financial (8.59%)
- Industrials (6.32%)
- Consumer Goods (5.49%)
- Oil & Gas (0.71%)
- Telecom (0.70%)
- Basis Materials (0.47%)
- Utilities (0.30%)
Nasdaq Composite vs. the Dow vs. S&P 500
Those three. When you turn on a financial TV program, tickers that highlight the movements of the top three stock market indices will stream over the screen. Our tech-focused index is the Nasdaq Composite, while the other two are the S&P 500 and the Dow Jones Industrial Average (often known as "the Dow"). There are also a few significant variations.
A different number of companies:
Each index includes a different number of public companies.
- The Dow is a club of 30 large, well-recognized public firms chosen to represent a sizeable chunk of the broad US economy.
- Some of the largest 500 publicly traded US corporations are included in the S&P 500.
- With a focus on technology, the Nasdaq Composite includes approximately 2500 firms.
Different emphasis:
Investors look to the S&P 500 and the Dow rather than the tech-restricted Nasdaq to determine "how's the market performing.”
- In order to offer a diverse, albeit condensed, the perspective of the market, the Dow includes 30 well-known, "blue chip" public firms.
- Due to its greater diversity and a greater variety of companies than the Dow, the S&P 500 is frequently seen as a more accurate representation of the US stock market.
- The Nasdaq Composite includes a sizable and diverse group of companies from the technology sector, providing insight into the performance of the larger technology market. However, since it does not adequately account for other sectors like food or fashion, it is not as useful as a gauge of the overall market.
Nasdaq vs. NYSE: What’s the difference?
You undoubtedly think of the NYSE first and foremost when you consider the stock market. The NYSE is the biggest stock exchange in the world and is home to thousands of well-known brands including McDonald's, Walmart, and Coca-Cola in addition to 70 of the largest multinational organizations.
Based on market capitalization, which is the total dollar worth of all the shares of firms that trade on it multiplied by the number of outstanding shares, the Nasdaq is the second-largest exchange after the NYSE. The exchanges are divided by focus in addition to market capitalization.
According to Steeno, Nasdaq is renowned for being the hub of innovation and technology, home to leading enterprises in the biotech, internet, and other sectors. On the other hand, the NYSE is home to a large number of blue chips, as well as industrials, financials, and businesses that have been around for centuries.
Other significant distinctions between the Nasdaq and the NYSE that you should be aware of include:
Age
The Nasdaq was founded in 1971; the NYSE has existed for hundreds of years.
Market Type
The NYSE is an auction market where investors trade goods and services with one another. The Nasdaq is a dealer market, which means that buyers and sellers transact through a dealer.
Cost
The Nasdaq charges cheaper listing costs than the NYSE; the lowest Capital Market tier listing fee is from $55,000 to $80,000. On the other hand, the lowest first listing charge on the NYSE is $150,000. This may ultimately influence where businesses choose to list their shares for trading.
Perceptions
The NYSE is thought to be less volatile than the Nasdaq since it contains stocks with established reputations. However, because Nasdaq is made up of startups and technology companies, some people think investing in companies listed there is riskier.
FAQ
What is Market Value?
The amount that buyers are willing to pay for an item on the open market is referred to as market value.
What is a Certificate of Deposit (CD)?
A Certificate of Deposit is a unique kind of bank account that normally offers higher interest rates in exchange for your agreement to refrain from making withdrawals for a predetermined amount of time.
What is a P-Value?
A "probability value" is what you use to test the idea that there isn't a meaningful connection between two variables.
What are Profitability Ratios?
By quantifying return on sales and investment, profitability ratios are analytical tools that assist investors in assessing a company's capacity to make a profit.
What is a Bitcoin Fork?
A bitcoin fork occurs when the software controlling the distributed network is updated, changing the validity of the current set of rules and occasionally leading to new iterations of the Bitcoin currency.