What Is the Nasdaq and How Does It Work?

Matthew Clark

5 years ago

Of the major U.S. stock markets investors keep a close eye on each day, the Nasdaq has emerged as one of the biggest — but exactly what is the Nasdaq and how does it work?

The Nasdaq was formed in 1971 by the National Association of Securities Details as a new way of trading stocks (more on this in a moment).

Of late, it has become one of the strongest performers. The Nasdaq 100 — which includes the top 100 nonfinancial stocks in the exchange — had a 5-year return of 155% to close 2019. Its 10-year return was around 240%.

The Nasdaq 100 has a market capitalization of nearly $8 trillion while the Nasdaq Composite has more than 2,500 stocks under its watch.

What Is the Nasdaq?

When it was launched on Feb. 8, 1971, the Nasdaq could not execute trades. Instead, it provided automated quotes.

After opening, it facilitated over-the-counter trading and was initially referred to as an OTC market.

Once the Nasdaq fully developed, it became the first exchange to offer online trading. Now, stocks are only traded through an automated network of computers, not by traders on a trading floor.

Nasdaq stands for the National Association of Securities Dealers Automated Quotations and is the second-largest stock exchange in the world based on market capitalization — more than $10 trillion worth of companies.

There are several rules companies must follow to be listed on the Nasdaq exchange:

Shareholder equity of at least $2 million.
At least 10,000 shares of public float.
A minimum of 300 shareholders.
Total assets of $4 million.
At least two market makers.
$3 minimum bid price of the company’s stock.
Public float market value of at least $1 million.

There are too many companies to list them all, but if you are interested in what stocks are there, check here. These are the top 10 companies listed based on volume:

Spherix Inc. (Nasdaq: SPEX) — 19,160,351.
Microsoft Corp. (Nasdaq; MSFT) — 10,113,486.
Apple Inc. (Nasdaq: AAPL) — 9,970,753.
Cisco Systems Inc. (Nasdaq: CSCO) — 5,351,129.
Intel Corp. (Nasdaq: INTC) — 5,222,944.
Gilead Sciences Inc. (Nasdaq: GILD) — 4,275,301
Fuelcell Energy Inc. (Nasdaq: FCEL) — 4,050,395.
Comcast Corp. (Nasdaq: CMCSA) — 3,723,895.
Sirius XM Holdings Inc. (Nasdaq: SIRI) — 3,250,594.
Plug Power Inc. (Nasdaq: PLUG) — 3,247,078.

There are other big companies listed on the Nasdaq, like Nvidia Corp. (Nasdaq: NVDA), Starbucks Corp. (Nasdaq: SBUX), Amazon.com Inc. (Nasdaq: AMZN) and Facebook Inc. (Nasdaq: FB).

How Is the Nasdaq Different From Other Indexes?

As opposed to the Dow Jones Industrial Average, the Nasdaq is based on the value of the companies’ outstanding stock. The Dow is price-weighted.

The S&P 500 index tracks 500 major companies and the Dow is an index with just 30 companies. Conversely, the Nasdaq is both an index and an exchange. It has more than 2,500 companies listed.

The Nasdaq is comprised of mostly tech-related companies — nearly 53% of the companies listed are tech companies. Only 22% of companies in the S&P 500 are from the tech sector.

There are three different market tiers a company can be listed on. Here they are, from the most stringent requirements to the least:

Global Select Market: This composite has 1,200 U.S. and international companies and it is weighted on market capitalization. Companies are reviewed annually and can be moved to, or off, the list.
Global Market: This is widely considered a mid-cap market and has 1,450 U.S. and international companies listed.
Capital Market: At one point, this was called the SmallCap Market as it has companies with much smaller market caps than the other two.

Despite the differences, all three indexes tend to fluctuate the same, meaning you can watch just one of them to see the larger market picture.

Milestones for the Nasdaq

It started in 1971, but it’s still had a good number of milestones in its short history.

Here are a few of those milestones:

Feb. 8, 1971 — Nasdaq index is created and set at 100 by the National Association of Securities Dealers.
July 15, 1995 — Closes over 1,000 for the first time.
Nov. 3, 1999 — Closes over 3,000 for the first time.
March 9, 2000 — Closes over 5,000 for the first time.
March 10, 2000 — Hits a record of 5,048 just before the dot-com bubble burst.
April 14, 2000 — Suffers its largest one-day drop (-355.49 points).
Oct. 9, 2002 — Sinks to 1,114 (the lowest since the dot-com crash).
March 2, 2015 — Closes above 5,000 for the first time since March 2000.
April 25, 2017 — Closes over 6,000 for the first time.
Jan. 2, 2018 — Closes over 7,000 for the first time.
Aug. 27, 2018 — Closes over 8,000 for the first time.
Dec. 26, 2019 — Reaches intraday record of 9,000 for the first time.
Feb. 19, 2020 — Closes at record high of 9,817.18.

Making Money With the Nasdaq

Just like the Dow and S&P 500, the Nasdaq is an index, not a stock. So, you can’t directly buy into it.

One way to make money with the Nasdaq is to buy companies listed on the index, but you will have to do a lot of research to find out which are the best ones for your situation.

But also like the other two indexes, there are exchange-traded funds that track the index and its performance:

PowerShares QQQ Trust (Nasdaq: QQQ) — Issued by Investco, QQQ is one of the most widely traded ETFs globally. It tracks the performance of the Nasdaq 100.
Nasdaq Composite Index ETF (Nasdaq: ONEQ) — This is issued by Fidelity, and 93% of its holdings are common stock in the index. It is weighted more toward information technology and health care companies.
First Trust Nasdaq 100 Tech Sector ETF (Nasdaq: QTEC) — Nearly 90% of the assets in this ETF are tech companies listed in the Nasdaq 100.

Remember, to get the latest news and information on the Nasdaq and other major indexes, check Money and Markets each day.