NASDAQ is an acronym for the National Association of Securities Dealers Automated Quotations. 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.
And the NASDAQ is also an index which is referred to as the NASDAQ Composite. When you hear that the “NASDAQ” was up or down, they are referring to the index.
This index measures over 3,000 stocks listed on the NASDAQ exchange and includes the world’s leading tech stocks including the FAANG stocks. The index 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.
The purpose of this article is to provide a brief history of the NASDAQ, explain how it’s different from the NYSE and the Dow Jones Index, and why the NASDAQ is important to investors.
What Were the Origins of the NASDAQ?
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 financially sound 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.
What Are the Listing Requirements for the NASDAQ?
For starters, the NASDAQ is a company. 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 lows 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 but are not limited to:
- Quantitative financial requirements (earnings, market cap, and assets)
- 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. And, 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.
How is the NASDAQ Different from the NYSE?
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.
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. As of June 2022, the NYSE includes approximately 2,400 companies with a market capitalization of over $28.2 trillion. The NASDAQ has over 3,300 listings with a total market capitalization of $11 trillion dollars. Why is this significant? The NYSE has been around since 1792 making it the oldest stock exchange and for almost 200 years the only game in town. As a result, it is home to many of what are seen as the blue-chip companies. The NASDAQ, by comparison, generally consists of stocks that are more volatile and growth oriented. In recent years, it is for housing the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google/Alphabet).
How is the NASDAQ Different from the Dow?
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.
The Dow Jones (also known as “The Dow”) is an index of what are considered the 30 biggest 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.
The NASDAQ is also an index, but it is also an exchange that 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.
What Does the NASDAQ Say About Investor Sentiment?
The NASDAQ offers growth investors a cue 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 up), 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.
Some Final Thoughts on the NASDAQ Stock Exchange
The arrival of the NASDAQ stock exchange 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, the NASDAQ gave these companies 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 cache. 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.