When companies are looking to raise capital, they offer pieces of themselves or “shares” of stock to investors. Since companies cannot directly buy or sell pieces of themselves to the general public, they put these shares for sale to investors through brokers. To ensure secure and orderly transactions, these companies find value in being listed on a stock exchange. These exchanges provide security to investors because the companies that are listed on their exchanges have to meet stringent regulatory requirements.
The most recognizable exchanges to investors in the United States are the New York Stock Exchange (NYSE) and the NASDAQ. While the NYSE is more immediately recognized, the NASDAQ plays a key role for companies and investors. It is, in essence, a truly American story that defines the spirit of innovation that is essential to our changing financial markets.
The purpose of this article is to define what the NASDAQ stock exchange is, how it’s different from the NYSE, what it measures, and why it’s important to investors.
What is the NASDAQ?
NASDAQ is an acronym for the National Association of Securities Dealers Automated Quotations. It is important to note that the word “Nasdaq” can also refer to Nasdaq, Inc, the corporation which runs the NASDAQ. While some people view the NASDAQ as a nameless, faceless exchange, the NASDAQ is a living, breathing company with a wealth of resources that are at an investor’s disposal. For example, Nasdaq, Inc. has a dedicated team that provides novice and experienced investors with a variety of information and advice. They also offer all the tools traders need including customizable stock alerts and instant quotes. It has a dedicated portal that allows investors to track market activity. The company also provides educational tools to help customers manage personal finance opportunities.
But for the purposes of this article, we're focusing on its role as a stock exchange. The NASDAQ stock exchange is owned by Nasdaq, Inc. and serves as an international electronic marketplace where investors can buy and sell securities. It is the second largest stock exchange in the world. The NASDAQ exchange lists stocks from virtually every sector of the economy. Although they are heavily weighted in technology, you will also see them as a leader in fields such as healthcare and biotech, energy and industrials and financial services.
What does the NASDAQ measure?
The NASDAQ Exchange forms an index, referred to as the NASDAQ Composite. This index measures over 3,000 stocks listed on the NASDAQ and includes the world’s leading tech stocks including the FANG stocks (Facebook, Amazon, Apple, Netflix, and Google). When you hear that the “NASDAQ” was up or down, they are referring to the index. This is a mathematical average of the stocks that are listed. The NASDAQ index can’t be traded. However, investors can purchase an index fund that is similar to a mutual fund or an ETF and is made up of the stocks in the index.
How did the NASDAQ come to be?
The NASDAQ started trading on February 8, 1971. It was created as an alternative to the NYSE so as to give new, emerging companies a way into the stock market. Since the NYSE is made up of primarily blue-chip companies with a large market capitalization, many good companies with modest assets had to look for alternate means to raise capital. At first, the NASDAQ only provided quotations and matched buyers and sellers with dealers. As it started trading, it became a source for speculative, over-the-counter (OTC) stocks to raise capital. However, when it became the first U.S. stock market to conduct online trading, it soon became the go-to exchange for technology stocks that saw it as a more modern way to list their stocks. In a way, it reflected the innovation that those companies represented.
How does a company get listed on the NASDAQ?
For starters, the NASDAQ is a business, so every company that wishes to be listed on the NASDAQ has to pay an initial listing fee. This fee can be between $50,000 and $75,000. In addition, there is an annual fee to remain as a member. This fee can be as low as $42,000 or as high as $155,000 depending on the company’s size.
But being part of an exchange is not just a matter of paying dues. To be listed, a company must meet a set of requirements. These include quantitative financial requirements (such as earnings, market cap, and assets) and corporate governance standards that give clear guidance about issues like shareholder rights and annual meetings.
Once a stock is listed, they must continue to meet regulatory requirements by making financial information about the company and the stock available to the public. Furthermore, the companies listed on the NASDAQ must meet SEC requirements, including the filing of financial reports. All of this is done to provide transparency to investors. For this reason, as the NASDAQ has “grown up” it is no longer the domain of speculative over-the-counter stocks.
What is the difference between the NYSE and NASDAQ?
Initially, the primary difference between the NYSE and NASDAQ was in the way trades were conducted. The NYSE is an auction market. As the word auction implies, trades occur between buyers who offer a bid price for a stock and sellers who have an ask price. The highest bidding price is matched with the lowest asking price. The NASDAQ, by contrast, started as a dealer’s market where these dealers served as middlemen between buyers and sellers.
With the advent of trading technology, the difference in methodology between the two exchanges is more subtle. The NASDAQ now automatically matches buyers and sellers similar to an auction system. And the NYSE relies heavily on computers to facilitate their trades. One of the differences remains, the presence of human “brokers” who still man the trading floor of the NYSE. The NASDAQ has never had a physical trading floor.
Another subtle difference comes with how the exchanges ensure liquidity and security. On the NYSE, each security has a Designated Market Maker (DMM) who serves as an auctioneer of sorts. Unlike the NYSE, each security on the NASDAQ has multiple Market Makers to help ensure liquidity. Apple, for example, has 54 registered Market Makers.
Yet another difference can be found in the size and profile of the companies listed with each exchange. The NYSE includes approximately 2,400 companies with a market capitalization of over $26 trillion. The NASDAQ has over 3,800 listings with a total market capitalization of $11 trillion dollars. Why is this significant? The NYSE has been trading and growing since 1792. As a result, it is home to many of what are seen as the blue-chip companies. They are well-established companies that are known for having less volatility. The NASDAQ, by comparison, generally consists of stocks that are more volatile and growth-oriented. In recent years, it is also known for housing the FANG stocks (Facebook, Amazon, Apple, Netflix, and Google/Alphabet).
What are the Differences between the Dow and NASDAQ?
The Dow Jones (also known as “The Dow”) is an index of 30 of the biggest U.S. companies in terms of scale and firm returns. When stock reports are given you usually hear reference to "The Dow was up X number of points" or "The Dow was down X number of points". This is referring to the average of these 30 stocks. It is considered to be a broad view of the market in general. You may also hear the phrase "advancers versus decliners”. This refers to how many stocks in the Dow 30 made gains for the day (advancers) and how many had losses (decliners).
The companies in the Dow 30 make up the Dow Jones Industrial Average (DJIA). Some investors may buy an index fund which contains only the securities that make up the Dow 30. Since an individual stock may be listed on either the NYSE or the NASDAQ (but not both), the index fund can be traded on both exchanges.
As we mentioned earlier, the NASDAQ is also an index, but it is made up of over 3,400 individual securities. Many of these securities are in the technology sector. Some of these securities may be part of the “Dow 30”, but the index as a whole is separate from the Dow. Like the Dow, many investors choose to invest in index funds that are tailored to stocks in the NASDAQ. The USAA NASDAQ 100 Index Fund (USNQX) is one such fund. This fund includes the 100 biggest stocks (non-financial) that are listed on the NASDAQ exchange.
The major difference between the two is that unlike the Dow, the NASDAQ is also an exchange where individual securities can be traded.
To sum it up, both the Dow and the NASDAQ are predictive indicators of the market direction. In the case of the Dow, the stocks can be listed on the NYSE or the NASDAQ exchanges. However, the NASDAQ is both an index and an exchange where only stocks that are listed on the NASDAQ are traded (although some may be part of the Dow 30). Companies in both the Dow and the NASDAQ have index funds that are publicly traded.
Why is the NASDAQ so important?
Because of the wealth of services it provides to investors, the NASDAQ plays an important role in the global economy.
The NASDAQ offers growth investors a clue to how much risk the market is willing to absorb at a given moment. For example, when you hear that the Dow is up (which usually means the NYSE is also up) and the NASDAQ is down, it typically signals a time of where investors may be less inclined to take risks. But when the NASDAQ is up and the Dow is down or trailing, it usually signifies that investors are more confident about the overall economy and are willing to assume more risk.
And as we stated earlier, the NASDAQ still plays a critical role in how many young companies go public. There were 34 initial public offerings (IPOs) posted on the NYSE in 2016. This was just three percent of the total volume of IPOs worldwide. By contrast, in that same year, the NASDAQ held 77 IPOs which was seven percent of global IPOs, more than double that of the NYSE.
The bottom line on the NASDAQ Stock Exchange
Not all stock exchanges are equal. The arrival of NASDAQ onto the scene in the 1970s created a choice for investors that meant more than just choosing Coke or Pepsi. By offering a lower cost of entry and welcoming start-ups with a focus on innovation, these companies now had a stock exchange that looked like them.
Today, the NASDAQ is the largest electronic stock market with over 3,000 companies listed. And ironically, the five largest companies in terms of market cap are listed on the NASDAQ. However, although this stock exchange has grown up a bit, it still retains its rebellious cachet. With its focus on technology stocks, many of the world’s most nimble and innovative companies look to get listed on the NASDAQ as a way to raise capital. It is almost synonymous with technology and serves as a predictor of the broader markets appetite for risk.