What is the Nasdaq and how does it work?
The Nasdaq is the second-largest stock and securities exchange in the world, behind only the New York Stock Exchange…
So it’s crucial for all traders to understand exactly what the Nasdaq is and how it works at a base level.
What Is the Nasdaq and How Does It Work?
The Nasdaq was created nearly 50 years ago by the National Association of Securities Dealers to enable investors to trade securities on a computerized, speedy and transparent system, commencing operations on Feb. 8, 1971.
The Nasdaq spans 25 markets and has one clearing house, with five central securities depositories. With the inclusion of several stock exchanges in the United States and Europe, the Nasdaq heritage includes the Philadelphia Stock Exchange, the first exchange established in the U.S. back in 1790, the Copenhagen Exchange created in 1808, as well as the Boston Exchange launched in 1834.
All of the trades take place electronically through brokers rather than in a physical location directly between traders.
In general, the Nasdaq holds more tech and growth-oriented businesses than other exchanges, but it’s also represented by some of the largest blue-chip companies in the world. Many of its equities represent high-tech software, computer and internet companies, although other industries trade on the index as well.
The index trades listed and over-the-counter stocks, with stock ticker symbols generally having four or five letters.
Nasdaq Listing Requirements
For a stock or security to be listed on the Nasdaq electronic exchange, a company must meet certain requirements based on its finances, liquidity, and corporate governance, be registered with the Securities Exchange Commission (SEC), have at least three market makers, and met other requirements based on company size and trading volume.
Once an application is submitted, it may take anywhere between four and six weeks for the company’s listing to be approved. So that, in a nutshell, is what the Nasdaq is and how it works.
What Companies Make Up the Nasdaq?
A collection of approximately 3,300 companies make up the Nasdaq. Alphabet Inc.: (Nasdaq: GOOG), Apple Inc. (Nasdaq: AAPL), Amazon.com Inc. (Nasdaq: AMZN), Meta Platforms Inc. (Nasdaq: FB) and Netflix Inc. (Nasdaq: NFLX) account for a bulk of the overall value of the index. These five companies are also recognized as the “FAANG stocks.”
Note: Google restructured and placed its legacy business under an umbrella corporation called Alphabet Inc., which is now the parent company of Google and subsidiaries like Chronicle, Verily and Waymo.
Other major stocks that trade on the Nasdaq include Microsoft Corp. (Nasdaq: MSFT), Gilead Sciences Inc. (Nasdaq: GILD), Intel Corp. (Nasdaq: INTC), Starbucks Corp. (Nasdaq: SBUX) and Tesla Inc. (Nasdaq: TSLA). Because it attracts mostly growth-oriented companies, the Nasdaq tends to be more volatile than the other exchanges.
How to trade the Nasdaq
There are several ways to directly invest in the Nasdaq through exchange-traded funds, with the most popular being the Invesco QQQ Trust Series 1 (Nasdaq: QQQ).
Here is a chart of the QQQ,which tracks the Nasdaq 100, over the past five years…
Just like the NYSE, the Nasdaq is open for trading between 9:30 a.m. EST and 4 p.m. EST. However, the Nasdaq also offers traders premarket and after-hours trading. Premarket hours are from 4 a.m. EST and 9:30 a.m. EST, and after-hours ranges from 4 p.m. EST to 8 p.m. EST.
So that’s what the Nasdaq is and how it works. Click here to read about the Dow, and here to read about the S&P 500.
Senior Strategist, WealthPress