The Nasdaq – we’ve all heard something about it at some point. You probably already know that it’s part of the stock market. And you’ve probably read a news article or heard a reporter talk about it going up or going down. If you’re curious about investing and want to know more about what the Nasdaq is and how it works, here are some key points to understand.
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What Does NASDAQ Stand for?
In a traditional stock exchange, if you wanted to buy a stock, you would have to call up a broker to find someone on the exchange floor available to complete the trade you want. If this system had persisted until today, you’d have to ask your broker to find a trader on the New York Stock Exchange willing to make a deal so that you could, say, buy 100 shares of Apple stock with the extra money you have after paying off some student loan debt. This in-person trading went on for almost 100 years until an organization called the National Association of Securities Dealers (NASD) decided to develop a faster, more efficient method of trading stocks.
The letters in the NASDAQ acronym stand for the National Association of Securities Dealers Automated Quotation. In the beginning, Nasdaq only listed a series of quotes for different stocks that revealed their value in the stock market. But eventually, the Nasdaq stock exchange was born, allowing stocks to be traded electronically for the first time in history.
Instead of relying on actual brokers to connect stock buyers and sellers, large networks of computers could complete the majority of the process. This new technology transformed the stock market. Today, electronic trading happens daily on different exchanges around the globe.
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The Nasdaq stock market had quotes ready for 2,500 stocks for the first time in February 1971. Initially, most of the stocks traded on the exchange were from newer, technology-based companies like Intel and Microsoft, but now the Nasdaq involves the buying and selling of stocks across multiple industries in different regions of the world.
The list of stocks has grown to over 3,500. We now have a Nasdaq Composite Index that tells us the general status of all the stocks being traded on the Nasdaq exchange. There’s also the Nasdaq 100 index, which track the performance of 100 of the stock exchange’s biggest non-financial brands.
Although a variety of stocks are listed on the Nasdaq, the rules say that to be counted in the Nasdaq average, your securities can’t be traded within any other stock exchange. Companies are divided up into three different tiers and must meet certain financial requirements (factoring in income, cash flows and total assets among other things) to be listed.
If someone says that the Nasdaq is moving in a certain direction, they mean that the weighted value of all the stocks is increasing or decreasing. While the Dow Jones Industrial Average is a price-weighted index, the Nasdaq index focuses on market capitalization and considers the value of all of the stock’s shares and the company’s size. So basically with the Nasdaq, the bigger the stock, the more power it has to determine the value of the whole index.
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The Nasdaq Composite Average
To come up with the number you hear for the Nasdaq composite, the weight for every single stock in the index gets multiplied by its updated share price. All of these numbers are added and then divided by a divisor that’s frequently adjusted as a result of things like stock splits (which is the case with the Dow, too).
When you look up a Nasdaq quote to see how the market is doing for the day, you’ll find a stock chart and sets of numbers showing you a lot of information. This includes the current value of the stocks, the price that the stocks were when the market opened and last closed, the net change (how the price of the stock now compares to where it was at closing the day before) as a decimal and percentage and the daily and average share volume (how many shares were bought and sold during normal trading hours). You can also see how specific companies within the Nasdaq composite are doing by finding their four- or five-letter ticker symbols.
The NASDAQ Opening and Closing Bells
Just like the New York Stock Exchange, the Nasdaq has opening and closing bells that ring to signal that a regular trading session is expected to either begin or finish up for the day. For nearly 20 years various companies, superstars and groups have taken part in these ceremonies. The New York Mets, GoPro and a police dog named Johnny Cash are a few of the lucky ones who are former Nasdaq bell-ringers.
Nasdaq trading begins daily at 9:30 a.m. Eastern time and concludes at 4:00 p.m. From time-to-time, Nasdaq halts trading to give companies time to share news or address an issue that might influence the price of their shares. These breaks (called Nasdaq halts) could last anywhere from one second to an hour.
The Bottom Line
If you’re getting into investing, the Nasdaq Composite Index is something you probably want to pay close attention to. By looking up quotes for the Nasdaq, you’ll learn how the stock market is doing and particularly how the newer sectors of the economy are valued. That can help you plan your long-term investing strategy.
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