Nasdaq Composite
Index
in popularity to the S&P 500 and DJIA.
The index provider does not impose a limit on the number of participants, so the Nasdaq Composite basket includes thousands of companies, and the capitalization exceeds $15 trillion. ETF providers use the IXIC basket to launch their funds, and the availability of futures, options and CFDs allows you to make money on the index and through active trading. From this article you will learn:
- General information about the Nasdaq Composite Index
- Composition of the Nasdaq 100 basket
- Calculation formula
- Stock selection criteria, rebalancing and basket revision
- How to Invest in the Nasdaq 100
- Factors influencing the Nasdaq Composite, index growth prospects
- Conclusion
General information about the Nasdaq Composite Index
Like other indices in this family, the Nasdaq Composite is a capitalization-weighted index, with just under 50% of its basket in the technology sector. There was no emphasis on this area, and this structure is due to the conditions for including companies in the index at an early stage of development.
IXIC was launched in 1971, during which time NASDAQ, the NASD (Association of Stock Dealers) automatic quotation system, began operating in the United States. At that time, there were no analogues in the United States; this attracted a lot of companies to the exchange, including representatives of the IT segment.
The Nasdaq Composite had to compete with the DJIA and the S&P 500. The index provider decided not to put forward strict capitalization and geographic requirements. Soon after the launch, there were only 50 companies in the basket; by the end of the 70s, the number of IXIC participants increased significantly, but the index stagnated - quotes fluctuated around the starting mark of 100 points. Rapid growth began only in the next decade.
The Nasdaq Composite Index has a variable number of participants, and their number is constantly growing. In 2015, the basket expanded to 3000+ companies. Due to the stock selection method, the index contains both giants with a trillion-dollar capitalization and businesses with a capitalization hundreds of times smaller.
IXIC is not 100% protected from collapses, but it can withstand crises relatively easily. The most significant fall in history was the collapse of the dot-com bubble, while the 2008 global crisis was weathered relatively easily by the Nasdaq Composite.
This is not the only NASDAQ index. In addition to the Composite, there is also the Nasdaq 100 (focus on technology companies) and Nasdaq Biotechnology (pharmaceuticals and biotechnology sector).
As for the Nasdaq Composite itself, several versions are calculated:
- PR (Price Return). This is a regular version of the index, calculated based on the prices of the corresponding shares. Dividends, their reinvestment and taxation features are not taken into account.
- TR (Total Return). The calculation evaluates the full reinvestment of accrued dividends.
- NTR (Net Total Return). Before reinvestment, dividends are “cleared,” meaning they are deemed to have been taxed before they are reinvested.
Initially, the Nasdaq index was calculated in American dollars, but now calculations in Canadian dollars have been added.
Features of work
Let's look at the technical features of the “technical” exchange itself:
- Bidding is carried out only in electronic format.
- Quotes are updated on the exchange server every second.
- Opening hours: 9:30–16:00 UTC-5. There is an evening post-trading session from 16:15 to 20:00.
The NASDAQ exchange is divided into two large sections: National Market (NNM) and Small Cap Market (NSCM). On the first, shares of medium and large companies are traded. There are high requirements for issuers here, so you won’t find startups here. But here there are a lot of companies that are already firmly established in the market, in which it is more or less safe to invest. On the NSCM, on the contrary, smaller companies are traded, and the requirements for issuers are lower. This is where you can find a startup that can take off in the future and bring you huge income. Trading on NSCM is riskier than trading on NNM.
Trading scheme
On the Nasdaq exchange, orders are executed not exactly the same way as on the Moscow exchange. NASDAQ has another category of participants - market makers. These are specialists who fight among themselves for the right to fulfill the request. The market maker's task is to combine the orders of the buyer and seller in the most beneficial way for both. If a buy order does not find a counter offer for any reason, the market maker will have to execute the order at his own expense by selling his shares. Each market maker has a reserve of shares of certain companies, the liquidity of which it must maintain.
From a trader’s point of view, the trading scheme is no different from working on the Moscow Exchange - you will work through a trading terminal and a broker. Only the broker representing your interests on the exchange communicates with market makers.
Composition of the Nasdaq Composite basket
The composition of the Nasdaq Index is constantly changing . If we evaluate the development of IXIC from the moment of its creation, we can see a clear maximum in the number of companies before the dot-com crash. Then new IT companies appeared en masse; at least a distant connection with the IT segment was enough to ensure an influx of investment. Before the bubble burst, there were more than 5,000 companies in the Nasdaq Composite basket.
Then their number began to decline and in 2012 dropped below 2,500. At the same time, the average capitalization of companies in the basket has been growing since the late 2000s.
Due to the nature of the inclusion of companies in the Nasdaq Composite, there is a wide range in capitalization in the basket. For example, Apple's capitalization exceeds $2 trillion, and the list is completed by such companies as Alfi (capitalization $43.37 million), Arts-Way ($15.57 million). Due to the fact that the index is weighted by capitalization, small businesses have virtually no impact on its quotes. It is better to study the full list of index components on investing.com, and not on the provider’s website; the stocks included in the basket can be sorted by various indicators.
Analysis of the basket by sector indicates a clear dominance of the technology industry. It accounts for slightly less than 50%; formally, the index includes the financial sector, the healthcare sector, and representatives of industry, but their “weight” is small.
Bell Ringing Ceremony
In the past, on stock exchanges, the start of trading was signaled by the ringing of a bell. Nowadays it’s more of a tribute to tradition, but Nasdaq’s management acted in an original way and turned the Bell Ringing Ceremony into a real show. Any company can submit an application and have the opportunity to ring the bell, starting trading or ending the trading session.
This is usually used as a publicity stunt to attract more attention. For example, companies that have held an IPO willingly take advantage of this. This is excellent advertising; a video will be displayed on a huge display board, which is guaranteed to attract attention.
The service is in great demand and is used almost daily. For example, on June 30, 2022, LegalZoom opened trading, thus marking a successful IPO. On the same day, Integral Ad Science closed trading.
Calculation formula
The provider reports that the index is capitalization weighted. This means that the calculation comes down to dividing capitalization by a certain divisor - a special coefficient that is not constantly recalculated, but only after changes are made to the composition of the index.
The calculation formula for the Nasdaq Composite looks like this
This is the standard formula for calculating capitalization-weighted indices. The numerator is the capitalization of the corresponding company, the denominator is the divisor, which is redefined during so-called corporate events. Corporate events refer to any decisions that can affect share capital.
Calculation is carried out every second. The latest IXIC value is published at 16:16 Eastern Time, which is the value published on news resources. CAD versions are calculated from 2022.
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Stock selection criteria, rebalancing and basket revision
At the initial stage, strict requirements were not put forward, but over time the index provider formulated a number of conditions, only if they are met do the shares have a chance to be included in the Nasdaq Composite basket.
The following criteria are used:
- Such types of securities as preference shares, convertible bonds, units are not eligible for inclusion in the IXIC basket.
- The company must be listed on the Nasdaq Stock Exchange.
There are no requirements for geographical location, belonging to a particular sector of the economy, capitalization and liquidity. Compared to other indices, the Nasdaq Composite has extremely flexible requirements for inclusion in the basket, which explains the large number of IXIC components.
The index does not have a standard procedure for quarterly rebalancing and revision of the basket once a year. The composition of the basket is updated every day, and the “weight” of each component is determined on a daily basis (using the standard NASDAQ “weighing” procedure).
If company shares no longer meet the basic criteria, then the securities are immediately excluded from the basket. Replacement is not provided.
Because of this logic, the composition of the basket is not limited and can be anything. There have been periods in history when the number of IXIC components was halved.
Trading procedure for Russian investor
Direct access to the Nasdaq Exchange is available to qualified investors only. An ordinary investor needs an intermediary to trade on this stock exchange.
I will list several possible options.
Through a foreign broker
A citizen of the Russian Federation can open an account with a foreign broker and gain access to instruments on the Nasdaq exchange and other American exchanges.
There is not much choice for a domestic investor:
- Interactive Brokers . One of the most popular brokerage companies in Russia. The advantages are the absence of a minimum deposit (but the recommended amount is from $30,000) and Russian-language support. The downside is that the commission is charged even if there are no transactions and is absent only if the amount in the account is more than $100,000.
- Score Priority . The company is owned by the Russian broker Finam. One of the advantages is that there is a commission-free tariff. The downside is that there is a minimum entry threshold of $5,000 and a commission for no transactions and for maintaining an account.
- Lightspeed . Not the most popular option. The minimum deposit here is 10 thousand dollars. Inactivity fee is $25 per month if the account balance is less than $15,000. In addition, there is no Russian-language support.
Shares on the St. Petersburg stock exchange
On the St. Petersburg Exchange you can buy American shares, as well as shares of the Nasdaq exchange holding company itself (ticker NDAQ).
Since 2002, when the company went public, its shares have risen in price from $12 to $125, and the issuer pays dividends of 1.8%.
Index funds on the Moscow Exchange
On Moscow Exchange you can invest in some instruments from the IT sector:
- Index fund from FinEx (ticker FXIT). It includes 90 companies, including Apple, Visa, Microsoft, Intel, IBM, Cisco. As of the end of 2022, one share cost 9,364 rubles. Over the past 5 years, the return has been more than 276% in rubles.
- Exchange-traded fund from Tinkoff (ticker: TECH). It focuses on the Nasdaq-100, selecting the 40 most popular companies from there. The price per share is $0.091.
- “Technologies 100” from Alfa Capital Management Company (ticker AKNX). The cost of one share is $17.87.
Factors influencing the Nasdaq Composite, index growth prospects
Despite the abundance of companies in the basket, the Nasdaq Compsite index is dependent on the technology sector. In the structure it accounts for slightly less than 50%.
Because of this feature, the index reacts extremely sharply to the state of the high-tech industry. The example of the dot-com bubble is indicative; at the turn of the millennium, the bubble quickly inflated and the Nasdaq Composite grew exponentially. The result of the ensuing crisis was a five-fold drop in quotations.
Despite the wide basket, the IXIC is not protected from periodic overheating. This is the main risk when working with Nasdaq Composite. You can recognize an inflating bubble by the acceleration of the growth of quotes; if the chart begins to rise almost at a right angle, then a correction is just around the corner.
The index also reacts to the state of the global economy. Thus, at the beginning of the coronavirus pandemic, IXIC fell, but then quickly recovered its losses and updated its historical extreme.
In the 10s, the index grew by 376.32%, which gives an impressive 37% per annum - this is higher than the average return of the stock market. Almost half of this growth occurred during the coronavirus pandemic. At that time, the American market was considered by investors as a “safe haven”; money was invested in it to protect against inflation; all indices grew rapidly.
A repeat of the same result in the next decade is unlikely. But the Nasdaq Composite can provide returns at least equal to the market average.
