The NASDAQ Composite is one of the most widely followed stock market indices in the world. It tracks the performance of thousands of stocks listed on the NASDAQ Stock Exchange, including major technology companies like Apple, Microsoft, and Amazon. Understanding how this index works can help traders and investors make informed decisions.

What is the NASDAQ Composite?

The NASDAQ Composite is a stock market index that includes more than 3,000 stocks listed on the NASDAQ exchange. Unlike the NASDAQ 100, which focuses on the 100 largest non-financial companies, the NASDAQ Composite covers a broader market spectrum, making it a key indicator of overall market performance.

The index is one of the most followed indices in the United States, alongside the Dow Jones Industrial Average and the S&P 500.

Technology giants like Apple, Microsoft, Facebook, Dell, Cisco, Oracle, and Intel make up the majority of the businesses listed on the NASDAQ Composite.

The NASDAQ 100, an index of the biggest non-financial firms listed on the NASDAQ Stock Market, is another element of the exchange.

In terms of market value, the NASDAQ has expanded from its founding in 1971 with just 50 companies to become the second-largest exchange after the NYSE.

Brief History of this index

NASDAQ was established in 1971 and has its headquarters in New York City. Being the world’s first electronic stock exchange when it was founded, NASDAQ was able to draw in new tech firms like Apple, Dell, Oracle, and Microsoft.

The composite index started out with 50 companies and a beginning value of 100. Today, there are over 3,000 companies, and in July 2018, the index hit a peak of 7,846.76.

Between 1995 and 2005, the NASDAQ Composite showed a range of results during the dot-com boom and recession. For the first time, the index surpassed 1,000 points in July 1995. A gradual rise ensued, reaching a high of 5,132.52 in March 2000.

The index dropped as low as 3,227 in April 2000 and as low as 1,108.49 in October 2002. Following the collapse, the index steadily rebounded until the Global Financial Crisis struck in 2007–2008.

The index hit its highest intra-day level since the dot-com implosion in the first quarter of 2007 at 2,861.51.

The index dropped below the 2,000 mark in September 2008, losing around 200 points. It finished at a low of 1,265.52 in March 2009.

The US Federal Reserve’s quantitative easing policy then assisted in the index’s slow recovery. In April 2015, the index broke a 15-year high of more than 5,000 points.

How is the NASDAQ Composite Calculated?

The NASDAQ Composite is a market capitalization-weighted index. This means that companies with higher market capitalization have a greater impact on the index’s movement. The formula used to calculate the index is:

Index Value = (Total Market Value of All Included Stocks) / (Divisor)

Since tech companies dominate the NASDAQ exchange, the index is often seen as a benchmark for the performance of the technology sector.

Why is the NASDAQ Composite Important?

This is widely used by investors for several reasons and they include:

Market Sentiment Indicator:
The index reflects the performance of a broad range of stocks, making it a reliable measure of market sentiment.

Tech Sector Performance:
Many of the world’s largest technology firms are listed on the NASDAQ, so the index is a strong indicator of tech industry trends.

Investment Benchmark:
Investors use the NASDAQ Composite to compare the performance of their portfolios against the broader market.

Factors That Influence the NASDAQ Composite

Several factors affect the movement of the NASDAQ Composite, including:

Earnings Reports:
Positive or negative earnings reports from major tech companies can impact the index.

Federal Reserve Policies:
Interest rate changes and monetary policies influence investor sentiment and stock prices.

Economic Data:
GDP growth, employment numbers, and inflation affect market performance.

Global Events:
Trade policies, geopolitical tensions, and pandemics can cause fluctuations in the index.

How to Trade the NASDAQ Composite

Traders and investors can gain exposure to the NASDAQ Composite in several ways:

Exchange-Traded Funds (ETFs):
ETFs like Invesco QQQ and Fidelity NASDAQ Composite Index ETF track the performance of the index.

NASDAQ Composite Futures:
These allow traders to speculate on future index movements.

Individual Stocks:
Investors can buy shares of companies listed in the index.

Conclusion

The NASDAQ Composite is a vital stock market index that provides insight into the overall performance of the NASDAQ exchange, particularly the tech sector.

Understanding how it works and the factors that influence it can help traders and investors make better financial decisions. Whether you’re a beginner or an experienced investor, keeping an eye on this index can offer valuable market insights.

Related Term

NASDAQ 100