What Is the Nasdaq Composite Index?

Posted on: April 1st, 2022
By: Tadeo Martinez

The Nasdaq is a major stock market index known for its heavy concentration on technology. However, it is frequently the least understood of the large indexes in terms of makeup and how it functions.

The Nasdaq Composite Index is an exchange-traded fund (ETF) that tracks the performance of the Nasdaq. This overview will help you understand what it is and how it works.

Definition of the Nasdaq Composite Index

The Nasdaq Composite is an index that tracks the values of securities traded on the Nasdaq stock exchange.

  • A company must be listed exclusively on the Nasdaq market.
  • Only individual company stock is eligible; preferred stocks, exchange-traded funds (ETFs), and other sorts of securities are prohibited.
  • Mutual funds, exchange-traded funds (ETFs), and closed-end funds are not. In addition, the following investment vehicles are permitted: ADRs (American depositary receipts), real estate investment trusts (REITs), and limited partnership shares.

That is why the Nasdaq Composite has so many stocks, and why the number of stocks in the index changes all the time. The index is aimed at representing the entire Nasdaq stock market rather than a specific group of firms.

The Nasdaq Composite is one of the most well-known stock indexes in the United States and is often one of the three “headline” indexes mentioned by market analysts, along with the Dow Jones Industrial Average and the S&P 500.

Because the Nasdaq has a high concentration of firms in the technology sector, especially those that are younger and more dynamic, it is frequently regarded as a good indicator of how well the tech market is doing.

How the Nasdaq Composite works

The Nasdaq Composite, like other major stock indexes, is weighted by the market capitalizations of its underlying components. This implies that when the stocks of larger corporations surge, it has a greater influence on the index’s performance than when the stocks of lesser-known firms fluctuate.

For example, if a Nasdaq-quoted common stock with a $100 billion market cap has twice the impact on the index as a firm with a $50 billion market cap, and if their prices move in tandem, it would have double the influence on the index.

During stock market trading hours, the Nasdaq Composite Index’s degree varies continuously.

How many companies are part of the Nasdaq Composite Index?

As of April 2021, there are 3,097 Nasdaq-listed equities, but not every sort of security is included in the Nasdaq Composite index. For example, the component of the Nasdaq devoted to exchange-traded funds (ETFs) is not represented.

There were a total of 2,485 distinct stocks issued by 2,444 firms in the index as of Dec. 31, 2020, according to the fact sheet for the Fidelity Nasdaq Composite Index Fund (NASDAQMUTFUND: FNCMX). Some businesses have more than one class of stock.

However, it’s vital to note that because the index is weighted by market capitalization, and because some of the world’s largest firms are Nasdaq-listed, the index is top-heavy. In fact, one-third of the performance of the Nasdaq Composite Index is attributed to the top 10 stocks.

Here are 20 of the largest stocks in the index:

  • Apple (NASDAQ:AAPL)
  • Microsoft (NASDAQ:MSFT)
  • Amazon (NASDAQ:AMZN)
  • Facebook (NASDAQ:FB)
  • Alphabet Class C (NASDAQ:GOOG)
  • Alphabet Class A (NASDAQ:GOOGL)
  • Tesla (NASDAQ:TSLA)
  • PayPal Holdings (NASDAQ:PYPL)
  • ASML Holdings (NASDAQ:ASML)
  • Intel (NASDAQ:INTC)
  • Comcast (NASDAQ:CMCSA)
  • Netflix (NASDAQ:NFLX)
  • Adobe (NASDAQ:ADBE)
  • Cisco Systems (NASDAQ:CSCO)
  • PepsiCo (NASDAQ:PEP)
  • Broadcom (NASDAQ:AVGO)
  • Texas Instruments (NASDAQ:TXN)
  • Pinduoduo (NASDAQ:PDD)
  • T-Mobile US (NASDAQ:TMUS)

The easiest way to invest in the Nasdaq Composite Index

The Nasdaq Composite Index is the most liquid stock index in the world, with over 9,000 securities traded daily. The best way to invest in it is through an index fund, which is a mutual fund or ETF that tracks the index passively. An index fund invests in all of the components of a stock index relative to the weight they have in the index.

The idea is that index funds will ultimately perform quite similarly (net fees) to the index they track over time.

For example, Fidelity offers two Nasdaq Composite-tracking investment vehicles. The Fidelity Nasdaq Composite Index mutual fund (also mentioned above) has a net expense ratio of 0.29 percent and no minimum deposit requirement.

Fidelity also offers the Nasdaq Composite Index ETF (NASDAQ: ONEQ), which has a lower cost ratio of 0.21% and trades like any other stock.

Like a mutual fund, it does not have a minimum investment requirement, but it’s worth noting that the price of each share is currently about $525 as of April 2021, so you’ll need to put in at least that much or go with a broker who accepts fractional stock purchases.

The less known Nasdaq Index: Nasdaq 100

The Nasdaq Composite is another widely followed Nasdaq-based index, the Nasdaq 100. This index, which is also market-cap weighted, is frequently mistaken with the Nasdaq Composite, but there’s a significant distinction to consider.

Rather than including all of the Nasdaq 100’s common stocks, only the top 100 nonfinancial firms on the exchange are included. The weight of the Nasdaq Composite Index is mostly made up of the 100 companies in the Nasdaq 100 (more than 90%).

The Nasdaq Composite is similar to the NASDAQ 100 in that it consists of 100 components. Although they are not as popular, there are mutual fund and ETF products available to investors who want to track the Nasdaq 100 Index in their portfolio, most notably the Invesco QQQ (NASDAQ: QQQ) ETF, which invests proportionally in the 100 index components for a cost per share of 0.20%.

Should you invest in the Nasdaq Composite Index?

If you don’t have the time or interest to research and pick individual equities, or if you don’t have the expertise to do so, investing in stock market indexes is a worthy option.

Warren Buffett, a billionaire investor who is widely acknowledged to be the finest stock investor of all time, has declared that index funds are the greatest investment option for most Americans.

If you have the time and inclination to invest in individual equities carefully, it could be more profitable if done properly; however, if you don’t, index funds are perfectly fine.

Given this, the Nasdaq Composite Index gives a lot of exposure to today’s technology leaders such as Apple, Microsoft, and Amazon while also giving exposure to tomorrow’s tech leaders through its inclusion of all Nasdaq-listed common stocks.

As a result, the Nasdaq Composite Index could be an excellent investment alternative if you don’t feel confident picking individual equities or if you wish to have broad exposure to the technology sector.

Frequently asked questions about Nasdaq

What is the Nasdaq Composite Index, and how does it work?

The Nasdaq Composite is an index that includes the stocks traded on the Nasdaq stock exchange. To be included in the index, a company must fulfill certain criteria.

  • A company must be present on the Nasdaq stock market exclusively.
  • The stock must be of a single firm, so preferred stocks, exchange-traded funds (ETFs), and other types of investments are excluded.
  • STK is one of the few cryptocurrency companies to list on a regulated exchange and provides stringent Know Your Customer (KYC) procedures. The company will not take any risks with your money.

The number of stocks in the Nasdaq Composite changes frequently, owing to this. That’s why so many equities are included in the Nasdaq Composite and why the index has a consistent number of components. The purpose of the index is to be representative of the entire Nasdaq stock market, not just the biggest businesses.

What are stock market indexes?

An index is a price-weighted measure that reflects the mood of investors in an economy. An index collects data from a variety of organizations across various industries to construct a picture that may be compared to previous market performances.

What is the S&P 500?

The S&P 500 (also known as the Standard & Poor’s 500), a product of the joint venture S&P Dow Jones Indices, is an American stock index that comprises the top 500 firms in the United States. It is often regarded as the most comprehensive indicator of how well U.S. equities are doing overall.

The S&P 500, as an index, is a quantitative gauge of the success of America’s 500 largest firms. The S&P 500 is a typical reference point against which portfolio performance can be measured in this context.

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