What Is the Nasdaq Composite Index?

Nasdaq, an electronic stock exchange, is one of the largest and top-rated stock exchanges in the world. The stock exchange is a host to large multi-million dollar companies from many parts of the world. It utilizes an electronic model for its operation which has aided a gross adoption of the stock exchange by large firms in many countries. The benefit of listing on a stock exchange that makes a company’s stock easily accessible to existing and potential investors from any part of the world has made the Nasdaq stock exchange a popular option for many companies. The composition of all companies listed on the Nasdaq stock exchanges is what is represented by the Nasdaq composite index. In other words, the Nasdaq composite index is a stock market index that has a record of almost all companies listed on the Nasdaq stock exchange. It is also regarded as a market-cap-weighted index of all companies listed on the Nasdaq stock exchange.

Nasdaq’s prominence in the stock exchange market has a high impact on its index. Thus, the Nasdaq composite index is one of the most popular and most followed stock market indexes in the world.

Investors always desire to be duly informed about a stock before making investment decisions. A stock market index is an efficient tool that helps investors in their decision-making process. As such, the Nasdaq composite index performs like a tracker to all existing stocks on Nasdaq. It gives an insight of their market performance to provide investors with good information on the Nasdaq listed stocks before making investment decisions.

History of the Index

The Nasdaq composite index was invented by Nasdaq in 1971. The value of the index was 100 at the time it started. The index grew massively over the years and began to outperform other large indexes in the market. This saw more and more people following the index up, thus causing a significant increase in the value of the index.

The index experienced a very notable spike in 1999 when the interest of investors was attracted to internet inclined companies. This led to major concentrations on the technology firms listed on the Nasdaq stock exchange. Hence, the Nasdaq Composite started becoming a representation of the performance of the overall tech industry on Nasdaq.

As of 2007 and over ten years after, the index was seen outperforming the S&P 500 consecutively with a cumulative return of about 608% during the period. The S&P 500 is another widely followed index in the market, it had a cumulative return of 236% during the same period.

As of late 2021, the index has become a host to over 3000 securities.

Understanding the Nasdaq Composite Index

The methodology adopted by the Nasdaq composite index is quite easy to understand. As said earlier, the index uses a market capitalization weighting methodology to track the value of the Nasdaq listed stocks.

The value of the Nasdaq composite index is calculated by multiplying the total value of the individual weights of each of the securities included on the Nasdaq stock exchange with the last price of each of the involved securities.

The result is further adjusted to a better reasonable figure to enable it to fit perfectly for reporting purposes. The adjustment is carried out by dividing the total value obtained from the first process by an index divisor.

The methodology adopted by the Nasdaq composite index ensures that the index is calculated continuously throughout the trading day, meanwhile it is reported at intervals every second. The finally confirmed value is reported at the later hours of the trading days.

Criteria for Inclusion in the Nasdaq Composite

Just as there are procedures and requirements imposed on companies for listings on stock exchanges, there are also criteria for inclusion in the Nasdaq composite.

Securities should be able to meet the criteria demands on the Nasdaq composite before inclusion in the index. They should possess either of the following qualifications:

• Nasdaq Listed Companies. Companies readily listed on Nasdaq, except for special cases of dual listing on other U.S markets prior to 2004.
• American Depositary Receipts (ADRs). The index requires that the supposed included security should possess American Depositary Receipts (ADRs) before it can be considered for inclusion.
• A common type of stock. This is a very crucial criterion for securities to be included in the Nasdaq composite index. They must fall under the category of common stocks.
• Ordinary shares and shares of beneficial interest (SBIs). This implies that the company uses either an ordinary shares system or the shares of beneficial interests.

Firstly, the concerned company is required to own Real Estate Investment Trusts (REITs) for inclusion in the index. Secondly, limited partnership interests and tracking stocks should take place. Unlimited partnership interest could disqualify the intending company. The company is also required to keep its stocks trackable.

Nasdaq Composite Composition

The Nasdaq Composite Index is composed of long-established companies that got listed on the Nasdaq stock exchange since launch and the later-established companies that joined along the way.

There are also companies that switched to Nasdaq from other exchanges. The total composition of these companies includes 48.39% of companies from the technology industry, 19.43% of companies with consumer services. Moreso, 10.22% of companies from the health care sector are also included in the index with 7.21% financial companies. The industries, consumer goods, utilities, telecommunications, consumer goods, utilities, telecommunications, oil and gas, and basic materials are in the index at the rates of 6.85%, 5.51%, 0.81%, 0.72%, 0.55%, and 0.32% respectively.

As of 2021, prominent companies like PayPal Holdings (NASDAQ: PYPL), Netflix Inc (NASDAQ: NFLX), Facebook Inc (NASDAQ: FB), Tesla Inc (NASDAQ: TSLA), Apple Inc (NASDAQ: AAPL), and lots more, form a majority of the large weighted companies that are included on the Nasdaq Composite index.

Nasdaq Composite vs. DJIA and S&P 500

Quite similar to the Nasdaq composite, DJIA, which is owned by the S&P Dow Jones Indices LLC, is also a stock market index that keeps track of significant stocks that are traded on the New York Stock Exchange (NYSE). 

Basically, Dow JonesIndustrial Average measures the performance of some large blue-chip companies in the United States. It has been performing so well that it captures the attention of people who wish to get valid updates on the performance of the overall stock market. Although both stock indexes function for similar purposes, there are some notable features that distinguish both indexes and make their functionalities quite different.

Unlike the Nasdaq composite that weighs stocks on the basis of their market capitalization, DJIA measures stocks based on their prices. As such, both index mechanisms for weighing stocks differ a great deal.

Besides, DJIA is not limited to only one stock exchange like the Nasdaq composite, but its functionalities are featured in the New York Stock Exchange (NYSE) and also extend to Nasdaq.

Quite interestingly, the S&P 500 index which rivals the Nasdaq composite index is as well considered a rival to DJIA as it is outperforming DJIA in terms of its accommodation capacity and some other features.

In other words, the S&P 500 hosts 500 large companies in the United States, while DJIA only hosts about 30 blue-chip companies in the same nation. Thus, they both accommodate companies only in the United States.

As said earlier, S&P 500 is one of the most commonly followed and one of the largest stock market indexes in the world. It connects with more than one stock exchange unlike many other indexes, it weighs stocks from the NASDAQ, NYSE, and Cboe BZX Exchange. Another distinguishing factor about S&P 500 is that it weighs stocks on a free-float and capitalization basis.

How to Invest in the Nasdaq Composite Index

Investing in Nasdaq composite index is easier than you could imagine. The index only requires potential investors to buy an index fund. This index fund could either be a mutual fund or ETF that keeps an exclusive track of the index. It is easier with Fidelity’s ETF.

Since an index fund allows investments in every security composed in an index with proportional weights as they are accorded in the index concerned, Fidelity’s exchange-traded fund is a perfect instrument for investment as it tracks the broad-based Nasdaq Composite Index and can as well be utilized for exposure purposes on the Nasdaq Composite.

The public believes that index funds will deliver virtually identical performance with the index they track in due time.

Conclusion

Nasdaq solves issues of complexities. The methodology it adopts is pretty easy for investors to understand. It is a big aid to helping them make reasonable investment decisions.

More interestingly, the investment process of the index is pretty easy as it only requires the purchase of index funds. All of these have been a major contributor to the swift growth in the activities and size of the exchange as it provides adequate customer services for companies and potential investors.

The exchange’s main focus on the technology industry has raised it over other exchanges considering the technology benefits and impacts it has on the market.