What is the Nasdaq? Investment guide
If you’ve been watching financial news or setting up your 401 (k), you’ve probably heard of Nasdaq. The Nasdaq is the second largest stock exchange in the world, just behind the New York Stock Exchange (NYSE), and is home to tech giants like Apple, Google and Amazon.
Since its introduction in 1971, the Nasdaq stock exchange has grown to include more than 4,000 business listings, including many of today’s largest companies. As the value of these companies increases and decreases with the economy, the value of any portfolio listed on the Nasdaq stock exchange also increases.
âThe Nasdaq has always been an electronic exchange and looked to the future of capital,â said Carol Schleif, deputy director of investments at BMO Family Office, a wealth management firm. “The Nasdaq has a reputation for being innovative, which is why so many tech stocks are listed there.”
But what exactly is Nasdaq and how does it work? Let’s take a look at one of the most recognized exchanges.
What is the Nasdaq?
The term Nasdaq is the original acronym for the National Association of Securities Dealers Automated Quotation. The name dates back to its beginnings, when it was first launched by the National Association of Securities Dealers (NASD), the predecessor of the Financial Industry Regulatory Authority (FINRA).
In 2006, the Nasdaq split from the NASD and became a separate entity. The following year, 2007, the Nasdaq announced that it would combine with the OMX Nordic Exchange to become Nasdaq OMX.
After the New York Stock Exchange (NYSE), the Nasdaq made history by introducing the idea of ââan electronic stock exchange in 1971. Its reputation remains one of the most famous stock exchanges in the United States, according to Joseph Hogue , CFA, investment analyst and founder of the investment education YouTube channel, Let’s Talk Money.
âThe Nasdaq was the first electronic exchange,â says Hogue. “This allowed investors to buy and sell stocks through a computerized system, as opposed to the physical trading room on the NYSE.”
Today, much of the trading on the NYSE is also done electronically, Hogue points out. The two popular exchanges have a lot of similarities in how they work. The NYSE still follows a hybrid model and, except during the COVID-19 shutdown, still uses traders for some of its trades. And while the Nasdaq is known for its e-commerce, it has a physical headquarters in New York City and nearly 40 offices around the world.
Understanding the Nasdaq
The Nasdaq provides access to different markets, including three different market levels: the Nasdaq Global Select MarketÂ®, the Nasdaq Global MarketÂ® and the Nasdaq Capital MarketÂ®
Each of the Nasdaq market levels has different listing requirements. Companies and closed-end funds can list on the Nasdaq Stock Exchange as long as they meet the listing requirements and pay the applicable fees.
In addition to the stock exchange, where stocks are listed and can be traded, it is possible to get an idea of ââthe value of the Nasdaq by looking at the Nasdaq Composite. The Nasdaq Composite is an index of all publicly traded companies (approximately 4,000), and it provides a benchmark for a segment of the stock market.
âThe NYSE has slightly higher listing requirements and higher fees, so small businesses generally prefer to list on the Nasdaq first,â Hogue explains.
Schleif also points out that startups and tech companies generally find it easier to get started on the Nasdaq. Now famous companies like Apple (AAPL), Alphabet Inc, parent company of Google (GOOG) and Amazon (AMZN) debuted – and are still listed – on the Nasdaq stock exchange.
The Nasdaq trading platform
The idea behind the launch of the Nasdaq trading platform was to provide a fair and efficient securities market. Over the years, says Schleif, the Nasdaq has been at the forefront of innovation in the marketplace, building a reputation for driving capital markets forward.
Trading on the Nasdaq is very similar to trading on the NYSE, according to Hogue.
âWhen you place an order to buy or sell stocks, it goes through a broker,â Hogue explains. “It is someone with a seat on the physical exchange or a computer connected to the exchange system.”
Ordinary people don’t have direct access to the Nasdaq – or any stock exchange. When you go online to trade stocks, Hogue points out, you are doing it through an intermediary. You can use an account with Robinhood, Fidelity, TD Ameritrade, or any broker you find online. No matter where you go, however, you need a facilitator to take care of the deal.
As long as you know the ticker symbol, you can trade a stock, whether it’s listed on the Nasdaq or the NYSE.
Once you’ve decided which stock you want to buy or sell, Hogue explains, the broker enters your deal with the exchange, matching buy and sell orders at the best price for each. When you do this online, it happens quickly, within seconds.
âSome stocks are listed on the NYSE while others are listed on the Nasdaq, so investors don’t really have a choice of which exchange the broker uses,â Hogue explains. “Most brokers have access to both, so this is the business you are interested in, not the exchange you want to use.”
Recent history of the Nasdaq
Currently, the Nasdaq Composite is above 14,000. However, prior to the recent surge following the 2008 financial crisis, the Nasdaq peaked above 5,000 in March 2000. It was the year of l dot-com collapsed, Schleif points out, and the Nasdaq Composite fell shortly thereafter.
âRebuilding this index has been a long process,â she says. “But since then, even some older NYSE companies have left and moved to Nasdaq, simply because of that innovative aura that comes from listing on Nasdaq.”
Apart from that, there have been other events in recent Nasdaq history that have turned heads:
- Nasdaq OMX joined the United Nations Sustainable Fellowships Initiative as a founding member in 2012.
- The first woman to lead a major exchange in the United States, Adena Friedman, became CEO in 2016. She started as an intern at Nasdaq.
- Nasdaq has proposed new registration rules related to board diversity, requiring companies to include diverse directors, in 2020.
The Nasdaq is an exchange where companies can list shares of their stocks. Investors access these exchanges through brokers and can buy and sell shares of the company. The Nasdaq is known for its innovation and claims the distinction of being the world’s first electronic stock exchange. Today, many of the world’s largest companies are listed on the Nasdaq, and you can buy and sell shares of these companies.