What is Nasdaq Stock Exchange? What Does Nasdaq Stand For? The Motley Fool
The Nasdaq Stock Market, or simply Nasdaq, is the second-largest stock exchange in the world for investors looking to buy and sell shares of stock. Nasdaq was initially an acronym, NASDAQ, which stands for the National Association of Securities Dealers Automated Quotations. It opened on Feb. 8, 1971, providing automated information about stock prices that investors could use to trade stocks on other exchanges. Eventually the Nasdaq became the world’s first electronic stock market, taking over trading for many stocks that had previously traded in places other than formal stock exchanges. Now the Nasdaq has formal listing requirements that companies have to meet in order to list their shares on its stock exchange. The Nasdaq has become the largest global exchange to rely solely on electronic trading.
- But over time, it recovered and surpassed other indexes as growth-focused tech companies thrived.
- With its $3 trillion market cap, Apple has the biggest weighting at about 14%.
- The Nasdaq has a comprehensive set of rules and also has internal groups that are designed to help safeguard the integrity of the exchange, including an Investigations and Enforcement Team and a group tasked with surveillance.
This means that the exchange designates market makers to facilitate trades and provide liquidity. They have an inventory of certain securities that they can transact with customers or other dealers. A dealer will specify a bid-and-ask for their securities and the spread is the profit they make on a trade.
Some investors also use the term the Nasdaq to refer to the Nasdaq Composite Index, an index of the stocks listed on the Nasdaq Stock Market. Because the Nasdaq Composite is dominated by the historically volatile technology sector, index performance tends to be more volatile than that of the S&P 500 or the Dow Industrials. These characteristics of volatility and a focus on tech stocks both factor into another Nasdaq-related development that has provoked judgment, more specifically the dot-com bubble of the 1990s and early 2000s.
Exchanges
The index’s value is calculated by summing the market capitalization of its components based on the current price of the constituents. Tech companies are drawn to the Nasdaq because of its reduced fees, easier listing requirements (compared to the NYSE), and the fact that it is known for listing a wide range of tech stocks. The Nasdaq is known for listing growth stocks, which is a good fit for tech firms. It also has two highly regarded indexes that track the performance of Nasdaq stocks daily. Knowing about these can be very helpful if you are researching investing in NASDAQ-listed companies.
The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. The first is a price return index and the other is a total return index. The total return index assumes the reinvestment of cash dividends distributed by companies included in the index.
The Nasdaq has helped bolster market efficiency through its focus on innovative technology. This exchange came into existence after the SEC encouraged the NASD to automate the market for OTC securities. Both Nasdaq indexes lean heavily into tech, consumer services, and health care — all top 3 white label open-source crypto exchange platforms top-performing industries in recent years. This might make it easier for any individual tech company looking to list on an exchange to get the attention of investors by listing on the Nasdaq.
What about Nasdaq as a company?
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
Other Major Exchanges
Nasdaq 100 is an abbreviated form of the Nasdaq 100 Index, the 100 largest non-financial companies by modified market cap trading on a Nasdaq exchange. The Nasdaq has affected the overall stock market by being a leader in innovation and striving to create new technology designed for greater transparency and efficiency. Its strategy of focusing on using technology to create a market (as opposed to relying on a trading floor like the NYSE, for example) has made it a natural leader in terms of driving innovation. Over time, Nasdaq stocks have tended to do better than the broader stock market. The Nasdaq is heavily weighted with technology stocks, making it a bellwether for the tech sector. As a result, the Nasdaq Composite is a widely followed barometer of the technology sector’s financial health.
Past that, the Nasdaq is more focused on growth stocks, and the shares of many different tech (and biotech) companies are more likely to cater toward investors seeking businesses with above-market growth prospects. Its main index is the NASDAQ Composite, which has been published since its inception. The QQQ exchange-traded fund tracks the large-cap NASDAQ-100 index, which was introduced in 1985 alongside the NASDAQ Financial-100 Index, which tracks the largest 100 companies in terms of market capitalization. There are more than 5,000 companies that trade on the exchange, including domestic and international firms. While its heavy tech weighting is responsible for much of its current outsize returns, it’s also led to similarly disproportionate drops.
However, an increase in volatility never materialized, but a short decline did. It’s difficult to say whether this was due to the rebalance or if the index was simply following the rest of the market—which is more likely because prices began trading upward in October 2023 market-wide. The Nasdaq draws these particular industry participants for multiple reasons. One key aspect is that it is easier to list on the Nasdaq than the NYSE, meaning that companies interested in having their shares trade there must meet less stringent requirements. This makes the Nasdaq more appealing to startups and other fledgling businesses. A pioneer in online operations when it launched in 1971, the Nasdaq provided a listing service for companies that had previously only traded over-the-counter (OTC).
Investing
The Nasdaq uses a computerized system to match buyers and sellers as opposed to using a trading floor. “The story of Nasdaq’s first five decades highlights its impact Day trading time frames on trading today,” he wrote. “The introduction of computers to markets, and sharing of quote data more widely, led to the automation of trading.” That means they can fall much harder and faster during market downturns.
It quickly became the home for many new and innovative high-tech startups, including Microsoft and Apple. The Nasdaq computerized trading system was initially devised as an alternative to the inefficient specialist system, which was the prevalent model for almost a century. The rapid evolution of technology has made Nasdaq’s electronic trading model the standard for markets worldwide. When you buy shares of index funds and ETFs, you’re purchasing a portfolio of securities. These may contain hundreds or thousands of companies’ stocks, depending on the index you select, which instantly diversifies your portfolio. Over the past more than 10 years, the Nasdaq Composite has outperformed other major stock market indexes.
The index, then, measures cumulative performance of all of its constituent stocks. The Nasdaq Composite Index is one of the most widely followed stock indexes in the U.S. Together with the Dow Jones Industrial Average and the S&P 500, it’s one of the three most popular stock indexes cited by market commentators to represent how the stock market as a whole is performing on any given day. Central counterparty clearing (CCC) technology is a significant potential growth area for OMX. OMX’s SECUR clearing[51] and Genium trading platform[52] facilitate trade novation, derivatives clearing, risk management and improved liquidity. SECUR clearing and Genium trading technology are in production around the world.
Unlike other exchanges, the Nasdaq has never had a physical trading floor, a place where market participants could gather and execute trades. At first, all trades were made via telephone, until the crash that took place in 1987, named Black Monday, exposed weaknesses in this approach, which caused the Nasdaq to shift to an all-electronic system. The Nasdaq Composite tracks the vast majority of the stocks listed on the Nasdaq Stock Market. It has outperformed the broader S&P 500 on an average annual return basis over the past 10 years (16% vs 13%). Typically, when an investor says “the Nasdaq,” they’re referring to the Nasdaq Composite, or IXIC. This is an index that tracks the performance of the Nasdaq Stock Market, an electronic platform used to buy and sell securities.
Nasdaq officially separated from the NASD and began to operate as a national securities exchange in 2006. In 2008, it combined with the Scandinavian exchanges group OMX to Automated trading become the Nasdaq OMX Group. The weighting of companies included in the Nasdaq 100 is rebalanced once a quarter, in March, June, September and December. Companies that no longer meet the Nasdaq 100’s rules for inclusion are replaced with new firms once a year in the third week of December.
