What Is the Nasdaq Composite?
When investors want to know how tech stocks, in general, are doing, they turn to the Nasdaq Composite Index. This index tracks the stocks listed on the Nasdaq stock exchange and is denoted with the symbol IXIC.
Along with other stock indexes like the S&P 500 and the Dow Jones Industrial Average (aka the Dow), the Nasdaq Composite Index is known as a bellwether index because it represents an entire category of investment, and its performance reflects big-picture economic trends. While the S&P 500 is known for large-cap stocks, and the Dow has some of the oldest and most well-known dividend-paying companies, the Nasdaq is synonymous with technology.
Once composed mainly of startups and small-cap tech stocks, the Nasdaq has since grown to include large-cap stocks in industries unrelated to technology, which we’ll discuss more below.
What Does Nasdaq Stand For?
Nasdaq is short for the National Association of Securities Dealers Automated Quotations (NASDAQ), and for a while was the world’s only electronic exchange, which meant it did not have a trading floor, and trades were made online. In fact, it was created to facilitate over-the-counter (OTC) trades electronically.
Which Sectors Make Up the Nasdaq Composite?
While the Nasdaq will always be synonymous with technology, today, the tech sector represents just over half of all of its composites. Consumer products, health care, financials, and industrials are also a part of the Nasdaq Composite. And it doesn’t only include startups: it’s also important to note that the market capitalization of these companies runs the gamut from micro-cap to large-cap stocks.
What Are the Top 20 Stocks in the Nasdaq Composite?
Some of the world’s biggest names can be found in the Nasdaq Composite.
In total, there are over 3,000 stocks listed in the Nasdaq Composite today. This index is designed to be reflective of the entire Nasdaq Stock Market.
What Are the Requirements for a Company to Be Added to the Nasdaq Composite?
In order to be included in the Nasdaq Composite, a company must trade on the Nasdaq stock exchange. It must also be classified as a common stock—ETFs, preferred stocks, and class A shares are excluded. However, American Depositary Receipts (ADRs), Real Estate Investment Trusts (REITs), and Limited Partnerships are eligible for inclusion.
How Is the Nasdaq Calculated?
The Nasdaq is a capitalization-weighted index, which means that each component is valued by market cap, or the total value of all outstanding shares. To calculate a company’s market cap, simply multiply the current price of one share by the number of outstanding shares.
Other stock market indexes, such as the Dow, are price-weighted indexes. The valuation for these components is based on share price, which gives companies with higher share prices a bigger impact on the index overall. Stock splits make a tremendous difference to price-weighted indexes, since the newly split stock has a lower price. For these reasons, analysts consider capitalization-weighted indexes to be a more accurate method of asset allocation.
History of the Nasdaq
The Nasdaq Stock Exchange was founded in 1971 by a group that would eventually become known as the Financial Industry Regulatory Authority (FINRA). The Nasdaq actually began as a way to provide over-the-counter quotes but later added the ability to make trades electronically. Along with the launch of the Nasdaq Stock Exchange, the Nasdaq Composite was formed, and during the Tech Boom of the 1990s, it was known for its emerging technology companies.
Unfortunately, many of the tech companies that made IPOs in the 1990s went bust by the early 2000s, as these companies simply could not live up to their hype, and earnings often disappointed. An asset bubble formed within the tech industry, and selloffs caused the Nasdaq to lose more than 75% of its value during this period. In fact, it would take until the year 2015 for the Nasdaq to reclaim its losses and peak once again.
Which Funds Track the Nasdaq Composite?
Fidelity Investments manages an exchange-traded fund (ETF) that tracks the Nasdaq Composite called the Fidelity Nasdaq Composite Index (ONEQ).
The top 100 companies in the Nasdaq Composite, by market cap, are known as the Nasdaq 100 Index. This sector also has ETFs that mirror it, such as Invesco (QQQ) and Invesco Nasdaq 100 (QQQM).
How Is the Nasdaq Different from the Dow or the S&P 500?
This chart illustrates some differences between the three indexes:
|Index||Companies||Weighting Method||International Holdings?||Created|
Float-adjusted market cap
Dow Jones Industrial Average
Modified market cap