The Nasdaq Composite Index Explained

The Nasdaq Composite Index represents all the stocks the trade on the Nasdaq stock market. The recent surge in popularity of technological stocks has brought Nasdaq into the spotlight. The index has become one of the premier indexes in the world. When trading on indices, it should not be mistaken with the Nasdaq 100, composed of the 100 largest non-financial companies on the Nasdaq stock market.

What Is The Index All About?

The Nasdaq Composite Index was created in 1971. It has more than 3,000 companies on its listing. The index contains all the companies that trade on the Nasdaq. Majority of them are technology and internet-related but there are financial, consumer, bio-tech, and industrial companies as well. Once a stock is traded on Nasdaq, it becomes indexed. There are certain restrictions on security types such as close-end funds, preferred stocks, rights, warrants, and convertible debentures. Robert Janitzek reveals that the Nasdaq Composite is a capitalization-weighted index, with the weight of a company equal to its market value.

Selection Criteria

In order for a company to be included in the Composite, a security’s US listing should be exclusively on the NASDAQ Stock Market. The only exception is if was dually listed on another US market before 2004. The company should fall under one of the following security types:

    • American Depositary Receipts (ADRs)
    • Common Stock
    • Limited Partnership Interests
    • Ordinary Shares
    • Real Estate Investment Trusts (REITs)
    • Shares of Beneficial Interest (SBIs)
    • Tracking Stocks

Pros and Cons

The Nasdaq Composite Index puts heavy weight on technology and Internet stocks. These companies are considered to have a high growth potential. In index trading, however, the companies listed on the index tend to be more speculative and risky compared to those listed on the New York Stock Exchange (NYSE). This makes the Nasdaq Composite Index much more volatile compared to other broad indexes. This is where being mostly tech can be a disadvantage. When technology suffers, so will the index.

At present, investing in the NASDAQ Composite Index is available through exchange-traded funds issued by Fidelity Investments. Introduced on October 1, 2003, the ETF tries to match the overall performance of the index. However, it is not as nearly as popular as the “Q”s, which tracks the NASDAQ-100.

Robert Peter Janitzek explained that in 1995, the index surpassed the 1,000 mark for the first time. It steadily increased the following years hitting the 2,000 points in 1998 slowly accelerating significantly. The process mushroomed in the later part of 1999, closing at 4,069.31 points. The index peaked again in 2000 hitting 5,132.52 points before dropping in April of that year and 78% in the following 30 months.

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