NASDAQ

What is NASDAQ?

The NASDAQ is a New York-based stock exchange which has a focus on technology companies. The exchange is home to the NASDAQ Composite Index, one of the world’s largest stock indices. The NASDAQ Index includes more than 3,300 listings and features some of the biggest companies in the world such as Starbucks, eBay, Microsoft, Apple, and Gilead Sciences. The NASDAQ also hosts the NASDAQ 100. This is an index that comprises the 107 largest non-financial companies that are listed on the parent exchange.

Since its early years, it has evolved dramatically, and NASDAQ today is the second-largest exchange in the world in terms of market capitalization, behind the New York Stock Exchange.

The term ‘NASDAQ’ can refer to the exchange itself or also to the NASDAQ Composite index or the NASDAQ-100. The Composite and the 100 are sometimes confused. The former refers to the stock of every company of the NASDAQ exchange. The latter is a capitalisation-weighted index which is home to the aforementioned 107 largest companies on the NASDAQ exchange.

Where have you heard about NASDAQ?

Chances are you’ve already heard of NASDAQ. Readers of the financial pages will have certainly come across the name at least. If you’ve ever been to or seen a picture of New York’s Times Square, then you’ll recognise the NASDAQ building immediately with the large electronic display on its façade which provides current and up to the minute financial details 24 hours a day.

What you need to know about NASDAQ…

History of the NASDAQ:

When it was founded in 1971 the original NASDAQ definition was the “National Association of Securities Dealers Automated Quotations”.

Owned by Nasdaq, Inc., it was the first electronic stock exchange in the world and was set up by the National Association of Securities Dealers. NASDAQ’s then innovative use of an all-electronic trading system attracted new growth companies such as Apple, Microsoft, Oracle, Dell and Cisco.

With over 1.8 billion trades every day, the NASDAQ today has a larger trading volume than any other stock exchange in the US. This makes it highly influential and it is closely followed by economists and investors. It is still considered second to the NYSE because the of the latter’s higher market capitalisation.

As an electronic exchange, the NASDAQ has no actual trading floor and conducts all its business through a computer and telecommunications system. It is what’s known as a dealers’ market. This means that stocks are usually bought by brokers through a market maker rather than buying directly from other brokers. The market makers deal in specific stocks and they hold a number of the stocks themselves. So, when a broker wishes to buy shares, he can purchase them through the market maker.

The NASDAQ Index from 1971 to 2015. (Source: macrotrends.net/1320/nasdaq-historical-chart)

The primary focus has always been on the technological industries. The rapid growth of these industries in the past 40 years saw the NASDAQ Composite Index close over the 1,000 points mark for the first time on July 17th, 1995. This trend continued to grow, and steady gains were made in the subsequent years. In 1998, the NASDAQ Index hit 2,000 and then it began to rapidly accelerate. In February 2000 it reached an all-time high of 6,828.99 points. By the following month, it had fallen to 3,227 and in the next three years it had fallen by 78% from its peak.

The sharp decline of the NASDAQ Composite Index was one of the signals of the start of the dot-com bubble burst. Other factors around that time, such as the World Trade Center attacks on 11 September 2001, the Afghan War, the threat of impending war in Iraq and the general air of pessimism as a result of these global events aided in this decline. On 10 October 2002, the NASDAQ Index hit the bottom of the bear market trend at 1,108.49. Recovery was slow in the years following and it took until May 2007 for the index to reach half of its peak value.

The financial turmoil of the 2008-2009 financial crisis saw the value of the NASDAQ Composite Index fall again to 1,265.52 in March 2009, a six-year low. The US Federal Reserve’s programme of quantitative easing helped the index to slowly recover once again.

In the wake of the financial crisis, as it looked as if things were beginning to settle, NASDAQ had started to establish a base from which the index would go beyond the 3,000 points mark for the first time in the 21st century. This first occurred on29 February 2012.

On 23 April 2015, the NASDAQ Index broke its 15-year record, though was still short of its all-time high. By October of the same year, the index had soared back to over 5,000 points.

Confounding the expectations of many in the media and the investment world, Donald Trump’s surprise election win in October 2016 saw the NASDAQ Composite Index closing at new record highs in the months following. Despite his confrontational style, less-than-diplomatic language and controversial speeches on other matters, the businessman-turned-politician’s policies on cutting taxes and rolling back financial regulations, as well as his corporate and investor friendly cabinet appointments, saw a certain level of confidence returning to investment markets and the NASDAQ today has seen a change of +25% in the year following the election, reaching new highs of over 6,500 points. 

The NASDAQ Composite Index in the year following the 2016 election of Donald Trump to the US Presidency. The index shows a change of over +25% in 12 months from around 5,200 points to over 6,500. (Source: nasdaq.com)

Criteria for inclusion in the NASDAQ Index

To be eligible for inclusion in the index, the following criteria must be met:

• The security must be listed exclusively on the NASDAQ stock market (except if it was dually listed on another market in the US prior to 2004 and has been continuously listed there since)
• Only certain types of security are accepted. These include American Depositary Receipts (ADRs), common stock, ordinary shares, Real Estate Investment Trusts (REITs), Shares of Beneficial Interest (SBIs), Limited Partnership Interests, and tracking stocks
• If a security at any time ceases to meet the above criteria, then it becomes ineligible for inclusion on the NASDAQ Composite Index and is removed

The NASDAQ Stock Market’s trading schedule (EST) is:

• Pre-market session - 4:00 am to 9:30 am,
• Normal trading session – 9:30 am to 4:00 pm
• Post-market session – 4:00 pm to 8:00 pm

There are three different levels of NASDAQ quotes available:

• Level 1 – Displays the highest bid and the lowest ask for each quote
• Level 2 – Displays all the public quotes from the market makers along with information from dealers who want to buy or sell stock and orders that were recently executed
• Level 3 – Allows market makers to enter their executive orders and quotes

NASDAQ comprises of three separate market tiers:

• Capital Market – An equity market for companies with relatively small market capitalisation levels (“small caps”). The listing requirements here are not as stringent as with other NASDAQ markets that list larger companies with much higher market capitalisation.
• Global Market -  This is comprised of stocks from companies with a mid-level of market capitalisation (“mid-caps”). This market consists of 1,450 stocks and each must meet the stringent liquidity and financial requirements set out by NASDAQ, as well as corporate governance standards.
• Global Select Market – For the “large cap” companies. This index is weighted according to market capitalisation and is made up of US and international stocks. These stocks represent the Global Select Market Composite. The 1,200 stocks in this market must meet the strictest requirements in terms of liquidity, finance and corporate governance standards. It is the most exclusive of the NASDAQ markets and every October, the NASDAQ Listing Qualifications Department undertakes a review of the Global Market Composite to ascertain if any stocks are eligible for the Global Select Market.