Simple explanation of what is Nasdaq


Stocks, shares, market or exchange are some of terms one repeatedly hears when they read financial news. One of the prominent names that usually pops up, when talking about stock market especially, is that of Nasdaq, but little do people know what that is or what is its significance. So, what is Nasdaq after all?

The Nasdaq stock market or NASDAQ (National Association of Securities Dealers Automated Quotations) is an American stock exchange owned by Nasdaq Inc. Besides being the second largest stock exchange center in the world, Nasdaq holds a special place in history of stock market for a variety of other reasons. Set up in 1971 it was the first electronic stock exchange in the world which is vastly different than the traditional physical trading floor where the traders would shout the offer prices. Nasdaq performs the trading functions through a network of computers. Further, it is the first exchange to have ever had a website, the first to store records on cloud and share its technology with other exchanges.

Originally set up by National Association of Security Dealers (NASD), it separated from them in 2006. Today, it lists 3600 of the world’s most innovative companies, which is also why it is the most regulated stock exchange in the world. It is also the fastest growing exchanges in the world. It doesn’t come as a surprise then that it attracts some the largest and fastest growing companies in the world who want to benefit from its vast range of products and services.

At the time of the setup, Nasdaq only provided quotations on the stocks traded, however later it also started to perform the electronic trades. Over the years it also added trade and volume reporting as well as automated trading systems. Subsequently, it attracted a number of high growth and technology companies like Apple, Google, Microsoft, Amazon, Intel and Oracle among others to be listed on the exchange.


Composition of Nasdaq



Stock Market Indices

You might have heard experts discussing about the state of market. They gather information from the stocks and determine what is the overall market sentiment, whether it performed well, or it went down or if they should invest or not, what if the prices decline. How do they analyze the market as a whole? That’s where the index comes in.

A stock market index is a basket of specific type of shares within a stock exchange. It is computed selecting a number of stocks and taking the weighted average of their prices. It usually helps the investors to gauge the market and compare to the investments.

Nasdaq’s main index is the Nasdaq Composite. It has been listed on the exchange since its inception and is one of the most prominent indices in the US. It is heavily composed of information technology companies. Along with this, two other indices were introduced as well, NASDAQ-100 which is a subset of the Nasdaq Composite and the NASDAQ Financial-100 which is composed of the 100 biggest companies listed on Nasdaq in terms of market capitalization.


Listing on Nasdaq

What companies can be listed on Nasdaq?

As the reputation of the index is at stake, Nasdaq would not allow any company which doesn’t fulfil its set standards to be listed on it. In this way, it is like an exclusive members-only club. These listing requirements range from the number of shares traded, the market capitalization or the size of the company, the price of stock and other corporate governance rules and a company must fulfil one or more. In addition, the companies must also meet the set standards in terms of earnings, capitalization and assets.

To increase transparency among the listed companies and investors and to increase their confidence, Nasdaq employed a three-tier system of listing. The companies would belong to each of these tiers based on their market size and respective requirements or being listed.


Nasdaq Capital Market – The tier is an equity market for companies with low-level market capitalization and usually requires less stringent requirements to get listed.


Nasdaq Global Market – Composed of 1450 stocks which have to meet the financial, liquidity and the corporate governance standards that are set. It is more exclusive than the Nasdaq capital market.


Nasdaq Select Global Market – consists 1200stocks which meet the strictest of standards set by Nasdaq. It is more exclusive than the Nasdaq Global market.



Performance


Nasdaq is an important part of the modern history of the financial world and its prominence and performance in the past can be analyzed to get a better understanding the stock market functioning. For example, due to Nasdaq being mostly populated by the tech giants and high growth firms, the dot-com boom and the subsequent bust can be matched by the rise and fall of the Nasdaq composite during that time. Overall due to large composition of tech stocks, Nasdaq’s performance has been strong over the last quarter century.



- Kartik Kukreja


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