The Nasdaq is the second largest stock exchange on earth. Over 3,700 public companies are listed for trade on the Nasdaq, with a collective market capitalization of over $19 trillion—only slightly less than the New York Stock Exchange (NYSE), with a total listed market cap of $25.5 trillion.
The Nasdaq made its name as the first all-electronic exchange, and it remains the first choice of many leading tech companies.
How the Nasdaq Works
Historically, stock exchanges were actual buildings where traders would gather to buy and sell securities. Transactions would take place on a physical trading floor, with prices determined by face-to-face negotiations between market participants. When it was founded in 1971, the Nasdaq was radically different—there was no trading floor and no in-person trading: All the buying and selling took place via a network of computer systems.
Today, all-electronic trading has become the norm, and very few securities exchanges still maintain a physical trading floor of any kind. One of the lesser-known outcomes of the Covid-19 pandemic has been to close down the few remaining physical trading floors.
But whether the buying and selling takes place in physical or virtual space, it’s facilitated by a network of investment firms called market makers. These firms hold and exchange the individual securities listed on any stock exchange, executing the trades you order when you decide to buy shares of stock. According to Nasdaq, over 2 billion shares trade on its electronic exchange daily, with a market value of about $12 trillion.
The Tech-Heavy Nasdaq
The companies that trade on the Nasdaq tend to skew toward tech-oriented firms. Part of that is because of the Nasdaq’s less rigorous listing requirements, which makes it a target for newer businesses, says Jason Steeno, president of CoreCap Advisors Investments.
“For an investor looking to add companies to their portfolio in the high-tech space, they would generally look to those listed on the Nasdaq,” he says. “Listing requirements for newer companies, like those also offering new or emerging technologies, are generally lower on the Nasdaq, removing potential barriers for newer companies wanting to go public.”
The Nasdaq exchange is open for trading between 9:30 a.m. and 4:00 p.m. ET Monday through Friday. Nasdaq also offers both pre-market and after-hours extended trading. The Nasdaq’s pre-market trading hours are from 4:00 a.m. until 9:30 a.m. ET, and after-hours trading runs from 4:00 p.m. until 8:00 p.m. ET.
Nasdaq Listing Requirements
Every stock exchange has its own rules for what companies can list and trade their stocks on it. In general, companies have to be registered with the U.S.Securities and Exchange Commission (SEC) and meet other exchange requirements, like financial thresholds.
Nasdaq has three different tiers, each with its own criteria. Overall, though, companies must:
- Adhere to requirements for finances, liquidity and corporate management
- Register with the Securities Exchange Commission (SEC)
- Have at least three market makers willing to facilitate the buying and selling of its security; most Nasdaq stocks average 14
In addition, companies may soon have to have at least one woman as well as one person who is not White or heterosexual.
The main attributes and qualifications for each of Nasdaq’s three tiers. Because each offers a variety of ways to meet each given group of criteria, please see Nasdaq’s guide for more information.
Nasdaq Global Select Market
The initial financial and liquidity requirements are strictest for the Nasdaq Global Select Market. Because of the strict criteria to be included in this tier, being a part of the Nasdaq Global Select Market is an indication of the company’s international stature. Companies must meet criteria for earnings, capitalization or assets, have at least 1,250,000 publicly traded shares and trade at at least $4 a share.
Nasdaq Global Market
Companies within the Nasdaq Global Market have international reach with their products or services. The requirements for the Global Market are more stringent than the Nasdaq Capital Market’s requirements but are less intense than that of the Global Select Market. Nasdaq Global Market companies must meet criteria based on income, equity, market value or total assets/revenue, have at least 1,100,000 publicly traded shares and trade at at least $4, with certain exceptions.
Nasdaq Capital Market
Companies on the Nasdaq Capital Market are focused on raising capita and are therefore typically younger than other companies, with less liquidity and revenue. That said, they must meet equity, market value or net income standards, have at least 1,000,000 publicly traded shares and trade for at least $4, again with certain exceptions.
Nasdaq vs NYSE
When you think about the stock market, you probably think of the NYSE first and foremost. The NYSE is the largest security exchange in the world and hosts 70 of the biggest global corporations as well as thousands of household names, like McDonalds, Walmart and Coca-Cola.
The Nasdaq is the second largest exchange after the NYSE based on market capitalization, or the total dollar value of all of the shares of companies that trade on it multiplied by the number of shares outstanding. Outside of market cap, the exchanges are separated by focus.
“Nasdaq is known for being the home of technology and innovation, with companies in the internet and biotech space along with others on the cutting edge,” Steeno says. “Conversely, the NYSE is home to many blue chips as well as industrials, financials and companies that have been in business for generations.”
There are several other key differences between the Nasdaq and the NYSE to keep in mind:
- Age: The NYSE is hundreds of years old, while the Nasdaq has only been around since 1971.
- Market Type: The NYSE is an auction market, where investors buy and sell to each other through an auction. The Nasdaq is a dealer market, meaning participants trade through a dealer.
- Cost: The Nasdaq has lower listing fees than the NYSE, ranging from $55,000 to $80,000 for its lowest Capital Market tier. For NYSE, the lowest possible initial listing fee, on the other hand, is $150,000. This can ultimately affect where companies decide to list and trade shares.
- Perceptions: The NYSE is made up of stocks with longstanding reputations, so it’s traditionally been viewed as less volatile than the Nasdaq. Nasdaq, however, is composed of technology companies and newer businesses, so some view companies listed on it as riskier investments.
What Is the Nasdaq Index?
When the media and news outlets talk about the Nasdaq, they’re often referring to a market index rather than the stock exchange itself.
A market index tracks the performance of a specific group of stocks that represent a particular industry or segment of the stock market. The Nasdaq Composite Index—more commonly known as simply the Nasdaq—is one of the most well-known and widely used indexes to describe the performance of the overall stock market.
Nasdaq is a very large index, containing approximately 3,000 common stocks listed on the exchange. By contrast, the Dow Jones Industrial Average (DJIA)—another index major benchmark for the U.S. stock market—tracks just 30 stocks. And in the middle, as its name suggests, the S&P 500 tracks the performance of 500 of the biggest companies in the U.S.
The Nasdaq Composite Index is mainly composed of technology companies, such as Apple (AAPL), Microsoft (MSFT), Amazon (AMZN) and Tesla (TSLA). However, companies in the oil, industrial, consumer goods and healthcare industries are also part of the Nasdaq.
The Nasdaq Composite Index isn’t the only Nasdaq index out there, though. The Nasdaq 100 index, for instance, tracks 100 of the largest and most actively traded securities within the Nasdaq.
Because the Nasdaq is so technology focused, it’s performed very well recently. For example, the 10-year performance for the Nasdaq Composite Index is 444.12%, and the 10-year performance for the Nasdaq 100 Index is 552.24%, as of March 19, 2021.
During that same time, the Nasdaq has outperformed other major indexes, such as the S&P 500, which only saw returns of 257.22%.
However, the Nasdaq is especially sensitive to tech stock dips and has experienced serious declines because of that, most notably when the dotcom bubble burst. It took the Nasdaq almost 15 years to reach new highs, and it didn’t fully recover, accounting for inflation, for almost 17. The broader stock market, on the other hand, took less than half that time to recover and reach new highs.
How to Invest in Nasdaq Stocks
To invest in Nasdaq stocks, you can look up the individual companies listed on the Nasdaq and purchase individual shares using your online brokerage account. However, purchasing individual stocks can be risky, and you’ll have to buy shares of multiple companies to diversify your portfolio and minimize the risk you lose money overall if one company does poorly.
A better choice could be to invest in Nasdaq stocks by buying index funds or exchange-traded funds (ETFs) that hold Nasdaq company stocks and seek to duplicate the performance of the overall index. That said, you probably don’t want to invest in only Nasdaq stocks or funds. The Nasdaq is heavily skewed by the technology sector, which can lead to disproportionately high—and low—returns.
“Generally speaking, investing in an index can provide exposure to more technology-oriented companies, but that comes with additional risk and should comprise only a portion of an investor’s portfolio,” says Steeno.