What is Nasdaq?
The Nasdaq Stock Exchange is the second-largest stock exchange in the world. The Nasdaq Composite is an index consisting of 3,000+ companies.
April 8, 2022
This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.
Investing in stocks is important for building wealth, saving for retirement and achieving financial goals.
Investing doesn’t need to be complicated, but it’s easy to get caught up in the noise. There are many confusing terms in the industry, like “Nasdaq.”
What is Nasdaq, anyway? And why does it matter for stock market investors?
What is Nasdaq?
Nasdaq is short for the National Association of Securities Dealers Automated Quotations. It’s a digital marketplace for investors to buy and sell shares of publicly traded companies.
Thousands of Nasdaq companies list their shares on the Nasdaq stock exchange. Buyers and sellers can come together (using brokers) to trade these shares.
Nasdaq is the second-largest stock exchange in the world, second only to the New York Stock Exchange (NYSE).
It’s a strictly digital stock exchange; all transactions take place digitally.
In contrast, competing stock exchanges like the NYSE still have live traders who conduct certain trades on the stock exchange floor.
Note: “Nasdaq” can also refer to the Nasdaq Composite, an index of over 3,000 companies listed on the Nasdaq stock exchange. More on this later.
A brief history of Nasdaq
Nasdaq was founded in 1971 and the name was an acronym — NASDAQ — standing for “National Association of Securities Dealers Automated Quotations.”
The original goal of the NASDAQ was to provide automated, electronic data that traders could use to buy and sell securities (stocks).
Then, NASDAQ transitioned to become the world’s first digital stock market.
Today, Nasdaq is the second-largest stock exchange in the world. Many of the world’s largest companies are listed on the Nasdaq Stock Exchange.
Stock exchange basics
Nasdaq is a stock exchange; a marketplace for buying and selling shares in publicly traded companies.
Nasdaq companies have chosen to list their shares on the Nasdaq, making it easy for investors to buy and sell those shares.
Each major country has its own stock exchange(s).
America has the New York Stock Exchange (NYSE) and Nasdaq
China has the Shanghai Stock Exchange and the Shenzhen Stock Exchange
The U.K. has the London Stock Exchange
Canada has the Toronto Stock Exchange
These exchanges are the actual infrastructure that allows the trading of shares in publicly traded companies.
Exchanges also permit new companies to list their shares for the first time. As companies grow, they sometimes sell shares in an initial public offering (IPO) to raise money.
What is the Nasdaq Composite?
The Nasdaq Composite is a stock market index composing more than 3,000 stocks that are listed on the Nasdaq exchange. It primarily consists of technology companies and biotech stocks.
The Nasdaq Composite is used by investors to get a birds-eye view of what technology stocks are doing in a given day, week or year.
Indexes like the Nasdaq Composite track the combined changes in stock prices of all the companies that are included in the index. Investors can look at the Nasdaq Composite to determine which direction the market’s heading or to track the long-term performance of the market as a whole.
The Nasdaq Composite is also commonly referred to as simply “the Nasdaq.” This can create some confusion.
The Nasdaq Stock Exchange is the actual marketplace where Nasdaq-listed shares are traded.
The Nasdaq Composite is an index that tracks the prices of 3,000+ stocks listed on the Nasdaq exchange.
The top 20 Nasdaq companies (by market capitalization) are:
Meta Platforms (FB)
Alphabet Class C (GOOG)
Alphabet Class A (GOOGL)
Texas Instruments (TXN)
Costco Wholesale (COST)
Technology companies dominate the index, accounting for over 50% of the total market cap of the Nasdaq Composite.
Because of this tech-focused weighting, the Nasdaq is often considered by investors to be the best gauge of how tech shares are performing.
But the Nasdaq includes many other types of stocks, as well.
Consumer services — around 16% of the index
Consumer goods — around 8% of the index
Financials — around 8% of the index
View the full Nasdaq sector breakdown here.
How investors interact with Nasdaq
There are three main ways that everyday investors interact with Nasdaq.
The Nasdaq Stock Exchange is where Nasdaq companies are traded. Investors can access this exchange via a broker, such as Fidelity, Vanguard or Robinhood. The Nasdaq handles much of the behind-the-scenes logistics of trading stocks, but investors don’t directly interact with the Nasdaq as a company; they interact with their stock brokerage company.
The Nasdaq Composite Index is an index that measures the performance of a basket of 3,000+ Nasdaq-listed companies. Investors can monitor this index to see how the overall stock market is performing. Because technology shares make up over 50% of the Nasdaq Composite, investors often look to the Nasdaq index to gauge how technology and growth stocks are performing.
Nasdaq index funds are funds that are set up to allow investors to buy into the Nasdaq Composite Index. Owning these funds enables investors to own a very small slice of every company that’s included in the Nasdaq Composite Index. FNCMX, offered by Fidelity Investments, is the largest Nasdaq index fund.
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