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What is The NASDAQ Index?

By Louis Holding-Parsons on August 20, 2018

5 (100%) 1 vote[s]

The ‘NASDAQ’ is a term that can refer to two different meanings: first, the National Association of Securities Dealers Automated Quotations exchange. This was the first electronic exchange that allowed investors to buy and sell stock on a computerized system, without the need for a physical trading floor. The second refers to an index. When you hear people say that the “the NASDAQ index is up today,” they are referring to the NASDAQ Composite Index. This index is where many stocks, especially technology, are listed and the area this article will expand on.

The NASDAQ Stock Market first began trading on February 8, 1971 and was the world’s first electronic stock market. At first, it was merely a “quotation system” and did not provide a way to perform electronic trades. It is now the largest U.S. equities exchange venue by volume and is the second-largest exchange in the world by market capitalization, behind only the New York Stock Exchange.

The Nasdaq Composite is not limited to companies that have U.S. headquarters – something that sets it apart from a number of other indexes. It is very common to hear the closing price of the Nasdaq Composite Index reported in the financial press or as part of the evening news because it is such a broad-based market index.

How Does The NASDAQ Index Function?

NASDAQ index valueThe index’s value equals the total value of the share weights of each of the constituent securities, multiplied by each security’s last price. The index is calculated continuously throughout the trading day, but it is reported once per second. The final confirmed value being reported at 4:16 p.m. each trading day.

For anyone looking to trade stocks, the Nasdaq Stock Market sessions (New York time) are:

  • 4:00 am to 9:30 am premarket session
  • 9:30 am to 4:00 pm normal trading session
  • 4:00 pm to 8:00 pm post market session

Unlike other major stock markets such as the New York Stock Exchange, the NASDAQ index has no physical trading floor where shares of stock are bought and sold. It is operated instead by a series of computer terminals. Trading as a Business is just a subject to technological change as every other sector!

More Volatile

NASDAQ indexDue to the way shares being electronically traded, stock prices on the NASDAQ index can rise and fall with break-neck speeds. The 2010 flash crash highlighted how the automation of markets can lead to increased volatility. Although not a macro event, such moves can happen in shorter time frames too. While other major exchanges may have only one specialist handling trades for a single stock, a NASDAQ stock may have multiple market makers handling a stock. Furthermore another 10 electronic communications networks are also possibly buying and selling that particular stock at any time. At the height of the dotcom boom in March 2000, the NASDAQ index peaked at 5,132.52, but fell to 3,227 by April 17. In the following 30 months fell 78% from its peak as a result of the dotcom bubble bursting. With the growth of tech sector constituents, such as Google, the NASDAQ index today is close to 8,000 points.

Nasdaq Index Composition is Tech-Heavy…

NASDAQ is technology heavyThere are more than 3,200 companies listed on the NASDAQ, and they cover the entire spectrum of the U.S. economy, from financial to transport. The majority of these listed entities are technology companies. Some are well-known companies such as Microsoft, Cisco Systems, Intel, Dell and Google. As of May 2018, the industry weights of the Nasdaq Index’s individual securities were as follows:

  • Technology at 46.40%
  • Consumer services at 20.16%
  • Health care at 10.86%, financials at 8.59%
  • Industrials at 6.32%
  • Consumer goods at 5.49%
  • Oil and gas at 0.71%
  • Telecommunications at 0.70%
  • Basis materials at 0.47%
  • Utilities at 0.30%

Although to many the Nasdaq index will be a figment of imagination it does touch us in day-to-day life. The brightly lit seven-story billboard displaying stock quotes, financial news and advertisements which you will notice in New York City’s Times Square is from stocks quoted on the NASDAQ index. Notoriously, Bernie Madoff, who is considered to have run the largest Ponzi scheme in financial history, is a former non-executive chairman of the NASDAQ stock market.

Conclusion

To get started and trade the NASDAQ is possible by opening an account with a reputable broker. You should thoroughly research the broker before you open your trading account, checking reputation and cost among other areas. Trading a main index such as the NASDAQ should be started with caution and slowly, employing risk management. Although beginner’s luck is possible, its more likely you will make beginner’s mistakes. Learning from these mistakes will eventually lead you to develop your own trading strategy and succeed in profitable trading.

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Louis Holding-Parsons

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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Louis Holding-Parsons

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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