The NASDAQ Composite Index began life in 1971 as an electronic price quotation system (the name comes from National Association of Securities Dealers Automated Quotations). The NASDAQ service gradually morphed into an online stock exchange and is now the second largest stock exchange in the world by market capitalization, after the New York Stock Exchange.
The NASDAQ Composite is a capitalization-weighted representation of the more than 3,000 equities listed on the NASDAQ Exchange. The NASDAQ Exchange has always been attractive to technology stocks and growth issues—in fact, back in the 1970s, it was more of a small-cap index as many newer firms listed there. But today it’s often referred to in news stories as “the tech-heavy NASDAQ,” as many of the biggest components are from that sector. Accordingly, the NASDAQ Composite is taken to be a proxy for investors’ risk tolerance, rising strongly when investors are feeling aggressive and falling when they’re feeling conservative.
As mentioned, NASDAQ, the “National Association of Securities Dealers Automated Quotations,” was at first just a quotation system and didn’t actually trade stocks. As the NASDAQ Stock Market got going, it included a lot of stocks that traded as speculative over-the-counter (OTC) issues.
The NASDAQ Composite Index has a pre-market session from 4:00 am to 9:30 am Eastern, a normal trading session from 9:30 am to 4:00 pm, and a post-market session from 4:00 pm to 8:00 pm.
It has three market tiers: Capital Market (small-cap) is an equity market for companies that have relatively small levels of market capitalization; Global Market (mid-cap) is made up of stocks that represent the NASDAQ Global Market, consisting of 1,450 stocks that meet NASDAQ’s strict financial and liquidity requirements; and Global Select Market (NASDAQ-GS large cap), consisting of 1,200 stocks and more exclusive than the Global Market.
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What is the NASDAQ Composite Index’s Technological Base?
As the exchange became the first U.S. stock market to start trading online, it attracted new tech companies who saw it as a more modern, more dynamic place to list their stocks. Those companies included, Apple, Cisco, Dell, Microsoft, Oracle and a host of others.
The exchange’s heavy weighting toward tech and other “riskier” issues lets investors use it as a barometer of how much risk investors are willing to take on at any one time.
And since its founding, the exchange’s technological foundation continues to expand. Currently, NASDAQ technology is implemented by over 150 market infrastructure organizations and more than 500 companies utilize NASDAQ’s technology solutions.
Recently, in March of 2019, the exchange also began to host two new cryptocurrency indices produced by CoinMarketCap, the cryptocurrency data publisher.
One index, CMC Crypto 200 Index (CMC200), covers the cryptocurrency market and includes Bitcoin in its analysis.
The other index, CMC Crypto 200 ex BTC Index (CMC200EX), tracks the cryptocurrency market but excludes Bitcoin which currently possesses a 37.5% market share.
Since powerful tech companies have fueled the NASDAQ’s growth for decades and continue to do so, its hard to imagine that the exchange will not keep expanding.
The NASDAQ Composite Index in Comparison
The three major U.S. indexes tend to trade up and down in tandem, although the Dow will typically show the least volatility of the three and the NASDAQ the most.
Growth investors look for differences in the movements of the three indexes for insight into how investors are feeling. When the Dow is outperforming the other two, it can indicate that investors are looking for value and lower risk.
When it comes to intermediate-term market timing, the most important thing about any index is its relationship to its 25-day and 50-day moving averages. When indexes are above those moving averages, buyers are in control and growth investors should be putting more money to work in strong growth stocks.
This simple signal is so important. It can get you into bull markets much more reliably than guesswork or trusting your own gut feelings. And, even more important, it can get you out of bear markets before real damage is done.
Yes, you’ll suffer a few whipsaws along the way, but you’ll never miss a major bull move, nor remain stuck in a major bear move. And that’s a big deal.
Knowing your stock market indexes can help make you a savvier investor.
What else would you like to know about the NASDAQ Composite Index? Leave a comment below.
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*This post was originally published in 2020 and is periodically updated to reflect market conditions.