Macro Mondays: NASDAQ
Welcome to another edition of Macro Mondays! I hope you're excited as I am to talk about one of the most well-known US indices - the NASDAQ! You hear a lot about the NASDAQ in the news, and many people assume that the index is nothing but high-growth technology companies, but that isn't the case.
Think you know about the NASDAQ? Well, you might not know 'JAQ' (get it?)
What is the 'Nasdaq'?
A global electronic marketplace for buying and selling securities, as well as the benchmark index for U.S. technology stocks. Nasdaq was created by the National Association of Securities Dealers (NASD) to enable investors to trade securities on a computerized, speedy and transparent system, and commenced operations on February 8, 1971. The term “Nasdaq” is also used to refer to the Nasdaq Composite, an index of more than 3,000 stocks listed on the Nasdaq exchange that includes the world’s foremost technology and biotech giants such as Apple, Google, Microsoft, Oracle, Amazon, Intel and Amgen.
What is the history of 'NASDAQ'?
Nasdaq officially separated from the NASD and began to operate as a national securities exchange in 2006. In 2007, it combined with the Scandinavian exchange group OMX to become the Nasdaq OMX group, which is the largest exchange company globally, powering 1 in 10 of the world’s securities transactions. Headquartered in New York, Nasdaq OMX operates 26 markets – primarily equities, and also including options, fixed income, derivatives and commodities – as well as three clearinghouses and five central securities depositories in the U.S. and Europe. Its cutting-edge trading technology is used by 70 exchanges in 50 countries. It is listed on the Nasdaq under the symbol NDAQ and has been part of the S&P 500 since 2008.
The Nasdaq computerized trading system was initially devised as an alternative to the inefficient “specialist” system, which had been the prevalent model for almost a century. The rapid evolution of technology has made the Nasdaq’s electronic trading model the standard for markets worldwide.
As a leader in trading technology from the outset, it was only fitting that the world’s technology giants chose to list on the Nasdaq in their early days. As the technology sector grew in prominence in the 1980s and 1990s, the Nasdaq became the most widely followed proxy for this sector. The technology and dot-com boom and bust of the late 1990s is exemplified by the rise and fall of the Nasdaq Composite during this period. The index crossed the 1,000 mark for the first time in July 1995, soared in the following years and peaked at over 4,500 in March 2000, before slumping almost 80% by October 2002 in the subsequent correction.
So what then is the 'Nasdaq Composite Index'?
The Nasdaq Composite Index is the market capitalization-weighted index of approximately 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities.
How is the 'Nasdaq Composite Index' Different from other US Indices?
Unlike other market indexes, the Nasdaq Composite is not limited to companies that have U.S. headquarters. It is very common to hear the closing price of the Nasdaq Composite Index reported in the financial press or as part of the evening news because it is such a broad-based market index.
What is the methodology of including stocks in the 'Nasdaq Index'?
The Nasdaq Composite Index uses a market capitalization weighting methodology. The index's value equals the total value of the shares weights of each of the constituent securities multiplied by each security's last price. This total is then adjusted by dividing by an index divisor, which scales the value to a more appropriate figure for reporting purposes. The index is calculated continuously throughout the trading day, but it is reported once per second, with the final confirmed value being reported at 4:16 p.m. each trading day.
Two versions of the Nasdaq Composite Index are calculated: a price return index and a total return index. The total return index includes the reinvestment of cash dividends on their respective dividend ex-dates. Both versions of the index include non-dividend cash distributions. On the market close of Sept. 24, 2003, both versions of the index were synchronized.
Changes in price due to corporate actions such as stock splits, stock dividends or spinoffs are made on the action's ex-date. Changes in total shares outstanding due to items such as conversions, stock repurchases, secondary offerings or acquisitions are usually made on the night before the action's effective date.
Eligibility requirements for the index are reviewed throughout the year. A security that does not meet the eligibility requirements can be removed at any time, usually at its last sale price.
What are the sector weights of the 'NASDAQ Index'? Is it all technology stocks?
Nope. As of May 31, 2016, the industry weights of the Nasdaq Composite Index's 2,569 individual securities are as follows: basis materials at 0.46%, consumer goods at 5.89%, consumer services at 20.92%. financials at 8.05%, health care at 13.94%, industrials at 6.35%, oil and gas at 0.64%, technology at 42.49%, telecommunications at 1.15%, and utilities at 0.11%.