What is NASDAQ?

Makeup of the NASDAQ

More than 3,300 companies now trade publicly on the NASDAQ exchange, and it is the second-largest stock exchange in terms of securities’ values and the largest electronic stock market. The NASDAQ trades shares in several different types of companies – including capital goods, consumer durables and nondurables, energy, finance, healthcare, public utilities, technology and transportation – but it is well-known for its high-tech stocks.

To be listed on the NASDAQ National Market (NASDAQ-NM), companies must meet specific financial criteria. They must maintain a stock price of at least $1 and the value of outstanding stocks must total at least $1.1 million. For smaller businesses unable to meet the financial requirements, the NASDAQ Small Caps Market is available. NASDAQ will shift companies from market to market as eligibility changes. [Learn how to manage your business finances.]

Trading on the NASDAQ

Because it is an electronic exchange, the NASDAQ offers no trading floor. The exchange itself is a dealers’ market, so brokers buy and sell stocks through a market maker rather than from each other directly. A market maker handles a specific stock and holds a certain amount of stock in his or her books. When a broker wants to purchase shares, he or she does it directly from the market maker.

When the NASDAQ first began, stock trading took place over a computer bulletin board system and through the telephone. Now, trading on the NASDAQ occurs using automated trading systems, which offer full financial reports on trades and daily trading volumes. Automated trading also offers automatic execution of trades based on parameters set by the trader.

The listing fees on the NASDAQ are significantly lower than other stock markets, with the maximum price set at $150,000. This low fee enables the trading of many new, high-growth and volatile stocks.

While the New York Stock Exchange (NYSE) is still considered a bigger exchange because its market capitalization is much higher, the NASDAQ has a greater trading volume than any other U.S. exchange – with approximately 1.8 billion trades per day.

With no trading floor, NASDAQ built the NASDAQ MarketSite in Manhattan’s Times Square to create a tangible physical presence. The large outdoor electronic display gives current financial information on the tower 24/7. Trading takes place Monday through Friday, 9:30 a.m. to 4 p.m. Eastern time, except for major holidays.

How to trade NASDAQ stocks

While there are many nuances to the way NASDAQ works behind the scenes, it’s very simple for investors who want to trade stocks on the NASDAQ. Stocks that trade on the NASDAQ are freely available for trading on any major stock-trading platform, just like those that trade on the NYSE.

To trade stocks listed on the NASDAQ exchange, all an investor needs to do is set up a brokerage account on a platform like E-Trade or TD Ameritrade, fund the account, find the securities they want to trade and place an order.

In fact, most major trading platforms allow commission-free trading for stocks listed on the NASDAQ – the same way they do for those that trade on the NYSE.

Popular NASDAQ indexes

Like any stock exchange, the NASDAQ uses indexes, which are a collection of industry-specific stocks. The indexes can be used to deliver a snapshot on the performance of the current market. Just as the NYSE offers the Dow Jones Industrial Average (DJIA) as its primary index, NASDAQ offers the NASDAQ Composite and the NASDAQ 100.

The NASDAQ Composite Index measures the change in more than 3,000 stocks traded on NASDAQ, whereas the DJIA measures the peaks and troughs of 30 large companies. The NASDAQ Composite is often referred to as just “the NASDAQ” and is the index most often quoted by financial journalists and reporters.

The NASDAQ 100 is a modified capitalization-weighted index made up of the 100 largest companies in market value that trade on the NASDAQ. These companies cover a range of market sectors, though the largest are generally technology-related. Companies can be added and removed each year from the NASDAQ 100 depending on their market value.

Both the NASDAQ Composite and the NASDAQ 100 include U.S. companies and businesses outside the country. This differs from other major indexes, as the DJIA currently only consists of U.S. companies.

History of the NASDAQ

Founded by the NASD, the NASDAQ opened on Feb. 8, 1971. The world’s first electronic stock market began by trading more than 2,500 over-the-counter securities. At the time, the NASDAQ was a computer bulletin board-type system. At first, no actual trading took place between buyers and sellers. Instead, the NASDAQ evened the traders’ odds by narrowing the spread between the bid price and ask price of stocks.

Thanks to its tech-heavy nature, the NASDAQ Composite took a major hit after the dot-com bubble burst in the late 1990s, dropping from over 5,000 to below 1,200. Here are some other notable dates on the NASDAQ timeline:

1975: NASDAQ invents the modern Initial Public Offering (IPO) by listing venture-capital-backed companies. This allows the underwriting syndicates to trade as market makers.

1985: NASDAQ creates the NASDAQ-100 Index.

1996: The first exchange website goes live: www.nasdaq.com.

1998: NASDAQ merges with the American Stock Exchange to form the NASDAQ-AMEX Market Group. AMEX was later acquired by NYSE Euronext in 2008 and its data was integrated into the NYSE.

2000: NASDAQ members vote to restructure and spin-off NASDAQ into a publicly traded shareholder-owner for-profit company: NASDAQ Stock Market Inc.

2007: NASDAQ acquires OMX, a Swedish-Finnish financial firm, and changes its name to NASDAQ OMX Group. NASDAQ OMX buys the Boston Stock Exchange.

2008: NASDAQ OMX purchases the Philadelphia Stock Exchange, the oldest stock exchange in the United States.

2009: NASDAQ OMX creates a mobile version of nasdaq.com, an industry first.

Why the NASDAQ is important

The NASDAQ exchange is significant because it was the first exchange that offered investors the ability to trade stocks transparently through an automated system. Today, the NASDAQ’s automated trading has become commonplace among other exchanges, but the NASDAQ remains unique because of its focus on high-tech companies.

The NASDAQ is also important because it’s relatively easier for companies to list on this exchange than others, such as the NYSE. This way, more businesses become publicly listed so investors can buy and sell their shares.

Lastly, the NASDAQ exchange offers investors a way to invest in much more volatile, potentially higher-growth securities than other exchanges that offer more stable, conservative companies.

Dock David Treece contributed to the writing and reporting in this article.