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What Is the Nasdaq Stock Exchange?

October 28, 2021

The Nasdaq is the second-largest major stock exchange, strongly reflecting the market moves of tech and high-growth companies, including those in biotech and health care.

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The Nasdaq is the second-biggest of the world’s 60 stock and securities exchanges, behind only the New York Stock Exchange (NYSE). It lists more than 3,800 companies representing industry groups such as technology, software, internet, consumer services, and health care. It is known for attracting innovative companies and industry upstarts, and it includes some of the world’s heaviest hitters, such as Amazon, Microsoft, Facebook, Apple, Starbucks, and Tesla.

What is the Nasdaq?

Nasdaq is an acronym for National Association of Securities Dealers Automated Quotations. People now use the name to refer to the Nasdaq Composite, one of its indexes, with more than 3,000 stocks. Nasdaq also refers to the Nasdaq Stock Market LLC,  the exchange itself, which is owned by Nasdaq Inc. The company also owns the Philadelphia Stock Exchange and the Boston Stock Exchange, as well as seven European exchanges.

The Nasdaq trading platform opened in 1971 as an electronic quotation system for share prices before evolving into the world’s first fully electronic stock market with transactions taking place over an automated network of computers, not on a physical trading floor.

Significance of the Nasdaq & how it works

Before the Nasdaq, stock exchanges were in brick-and-mortar buildings where traders came together on trading floors to buy and sell securities. These exchanges relied on people who worked on the floor and were responsible for trading specific stocks.

The Nasdaq created an alternative, with buying and selling taking place over a computer network. This transformed trading, increasing the pace at which investors could buy and sell. Today, electronic trading is standard. Even the NYSE, famous for its trading floor full of shouting brokers negotiating orders with hand signals, has mostly switched to electronic trading.

Regardless of where the trading takes place, it is facilitated by market makers, which are dealers or traders whose job is to maintain efficient trading. The Nasdaq uses broker-dealer members of Nasdaq who maintain their own stock supply and buy and sell from their inventory to individuals and other dealers. Whether they are called specialists or dealers, they perform a similar function by ensuring markets remain liquid, buying when others are selling and selling when others are buying.

From its beginning, the Nasdaq used a quotation system that facilitated over-the-counter (OTC) trading of securities outside formal exchanges through dealer networks. In its early years, Nasdaq was referred to as an OTC market. Today, it trades listed stocks as well as OTC stocks. When it added automated trading systems that could create trade and volume reports, it became the first exchange with online trading. It was also the first exchange to launch a website and store records in the cloud.

Nasdaq listing requirements

To list a stock or security on the Nasdaq exchange, a company must:

  • Be registered with the Securities and Exchange Commission and have a minimum of 1,250 publicly traded shares outstanding
  • Have a regular bid price of at least $4 a share, with some exceptions
  • Have at least three market makers
  • Meet earnings, capitalization, and/or asset thresholds
  • As of August 2021, have one director who self-identifies as female and one who self-identifies as an underrepresented minority or LGBTQ+

Companies pay a $25,000 application fee and pay between $150,000 and $295,000 in entry fees if the listing is successful. It can take four to six weeks for a listing to be approved.

Nasdaq companies, once they’re approved, will list in one of three tiers on Nasdaq:

  • Global Select Market. This comprises U.S. and international stocks that meet Nasdaq’s highest standards. Being part of the Global Select Market is considered a mark of the company’s international importance.
  • Global Market. This mid-cap market consists of companies that have a broad national and/or international reach and meet criteria on income, equity, market value, or assets/revenue, and have at least 1.1 million publicly traded shares.
  • Capital Market. The companies on the Capital Market, formerly called the SmallCap Market, is a large list of smaller cap companies that still meet standards, such as 1 million publicly traded shares.

Nasdaq’s major indexes

Although Nasdaq is a stock exchange, it also has two major indexes that track its daily performance.

Nasdaq Composite Index

The Nasdaq Composite Index tracks nearly 3,000 stocks listed on the Nasdaq exchange. This index includes everything but mutual funds, preferred stocks, and derivatives. It often is used as a benchmark for US equity markets, and because it is heavily weighted in technology stocks, it is considered a good gauge for the health of the tech industry.

Nasdaq 100

This index tracks the 100 largest and most actively traded securities within the Nasdaq Composite. While the Composite Index is considered more influential, traders who are interested in futures, options, and exchange-traded funds pay a lot of attention to the Nasdaq 100.

Nasdaq vs. NYSE: important differences

The Nasdaq is second to the NYSE based on the total value of the shares traded daily, although trading volume is roughly the same, at about 4 billion shares. But one of the main differences between Nasdaq and NYSE is the former’s focus on technology stocks. Its rise paralleled that of the technology industry in the 1980s and ’90s.

Because listing requirements for the Nasdaq are not as stringent as the NYSE, and the Nasdaq comprises so many tech and high-growth companies, trading tends to be more volatile than on the NYSE, which has older, more established companies.

Other key differences between the exchanges include:

  • Nasdaq is the upstart, opening in 1971, while the NYSE started in 1792.
  • The NYSE is an auction market (buyers and sellers enter competitive bids simultaneously, and the price a stock trades at represents the meeting point). The Nasdaq is a dealer market (multiple dealers post prices at which they are willing to buy or sell). Dealers trade when a price is agreeable to buyer and seller.
  • The NYSE is a broader and larger market than the tech-heavy Nasdaq.
  • NYSE trades both electronically and on a physical trading floor, while the Nasdaq is completely electronic.
  • The Nasdaq has lower listing fees than the NYSE because of Nasdaq’s three-tiered system.

How to invest in Nasdaq stocks

Investors could create their own portfolio that replicates the Nasdaq 100 or selections from Nasdaq Composite by buying individual stocks. But purchasing individual stocks can be risky, and it would be costly and complicated to buy the shares in the indexes in proportion to their weightings.

Other ways to invest in Nasdaq stocks include buying index funds or exchange-traded funds (ETFs) that track the performance of the index. Some of these include:

  • Fidelity’s Nasdaq Composite ETF (ONEQ), which invests in the entire Nasdaq Composite.
  • Invesco Unit Investment Trust QQQ ETF (QQQ), which tracks the Nasdaq 100.
  • Fidelity Nasdaq Composite Index Fund (FNCMX), a mutual fund.

Nasdaq Inc. (NDAQ) is actually a public company, and investors can buy shares. However, you’d be investing in the company, not the stocks on its exchange.

The bottom line

The Nasdaq is the second-largest major stock exchange, strongly reflecting the market moves of tech and high-growth companies, including those in biotech and health care. The performance of these exchanges, tracked by indexes, also are good gauges of public sentiment about the economy.  

Perhaps the biggest difference between the Nasdaq and NYSE is the kinds of stocks investors will find listed. The NYSE has a higher share of mature companies, while Nasdaq hosts more new companies with volatile shares.

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