NASDAQ
Key Takeaways
- NASDAQ refers to both a stock exchange and a market index
- The NASDAQ Composite is technology-heavy, with tech stocks representing ~50%+ of the index
- It was the world's first electronic stock exchange, founded in 1971
- Home to major companies like Apple, Microsoft, Amazon, and Google
Definition
NASDAQ (National Association of Securities Dealers Automated Quotations) is both a global stock exchange and home to several stock market indices. As an exchange, NASDAQ is the second-largest in the world by market capitalization, behind only the New York Stock Exchange (NYSE). As an index, the NASDAQ Composite tracks all ~3,000+ stocks listed on the NASDAQ exchange.
Founded in 1971, NASDAQ was the world's first electronic stock market. Unlike the NYSE, which historically used floor traders, NASDAQ operates entirely through a computerized network. This electronic model attracted many technology companies, which is why NASDAQ became synonymous with the tech sector.
The NASDAQ-100 index, a subset of the NASDAQ Composite, tracks the 100 largest non-financial companies listed on the exchange. It includes technology giants like Apple, Microsoft, Amazon, NVIDIA, and Alphabet, making it one of the most widely followed indices for technology and growth stocks.
How It Works
As an exchange, NASDAQ matches buy and sell orders through an electronic system with multiple market makers who compete to provide the best prices. This differs from the NYSE's specialist system. NASDAQ lists over 3,000 companies and handles billions of shares traded per day.
The NASDAQ Composite index is market-cap weighted, covering all common stocks listed on the NASDAQ exchange. Because many of the world's largest technology companies chose to list on NASDAQ, the index is heavily concentrated in the technology sector (~50%+), with significant representation from consumer services and healthcare as well.
Investors can gain exposure to the NASDAQ-100 through popular ETFs like the Invesco QQQ Trust (QQQ), which tracks the NASDAQ-100 and is one of the most actively traded ETFs in the world. The NASDAQ-100's performance often reflects investor sentiment toward technology and growth stocks.
Example
During the 2020-2021 period, the NASDAQ Composite surged over 100% from its March 2020 low as technology companies benefited from pandemic-driven digital acceleration. In 2022, the NASDAQ fell 33% as rising interest rates deflated tech valuations — demonstrating the index's sensitivity to rate changes due to its growth-stock composition. An investor holding the QQQ ETF experienced both the outsized gains and the sharper drawdown compared to the broader S&P 500, which fell only 19% in 2022.
Why It Matters
The NASDAQ is essential for investors because it represents the epicenter of technology and innovation investing. Many of the world's most valuable and fastest-growing companies are listed on NASDAQ, and its performance is a key barometer of investor sentiment toward technology and growth stocks.
Understanding the NASDAQ helps investors appreciate the difference between exchange listing (where a stock trades) and index inclusion (which benchmarks track it). A stock can be listed on NASDAQ and included in the S&P 500. The NASDAQ exchange and the NASDAQ indices are related but distinct concepts.
Advantages
- Home to the world's most innovative technology companies
- Electronic trading system provides fast, efficient execution
- NASDAQ-100 provides concentrated tech/growth exposure
- Lower listing fees attract high-growth companies
Limitations
- NASDAQ Composite is heavily concentrated in technology
- Higher volatility than broader market indices
- Fewer value-oriented and industrial companies
- Performance is disproportionately driven by a handful of mega-cap tech stocks
Frequently Asked Questions
Related Terms
Browse more definitions in the financial terms glossary.