Nasdaq is the second-largest stock market in the world. That's the result of its 2008 merger with OMX ABO, a Stockholm-based operator of exchanges located in the Nordic and Baltic regions. It trades 19.5% of all equities, slightly less than the New York Stock Exchange (NYSE), which trades 23.3%.
Its market capitalization is $11.1 trillion, a bit less than half that of the NYSE's market cap of $28.5 trillion. Despite its size, Nasdaq raised $28 billion in initial public offerings (IPO), similar to the $30 billion raised by the NYSE.
Nasdaq is also an equities index that tracks the stock prices of many of the companies listed on the Nasdaq exchange. Analysts use the Nasdaq to gauge the health of the stock market. It reflects investors' confidence in those companies and in the economy overall. Understanding the Nasdaq will help you understand how the stock market works.
What Does "Nasdaq" Stand For?
The name "Nasdaq" originally stood for the "National Association of Securities Dealer Automated Quotation" system. Nasdaq was founded in 1971, and it introduced the world's first electronic stock market. It provided quotes for over-the-counter stocks not listed on other markets. As a result, it is commonly associated with technology stocks.
How Many Stocks Are in the Nasdaq?
Nasdaq lists stocks of over 3,800 companies, including some of the most successful technology stocks: Apple, Microsoft, Alphabet (Google), Intel, Facebook, Amgen, and Tesla.
It also offers trading in derivatives, debt, commodities, structured products, and exchange-traded funds.
Nasdaq Versus the Dow and S&P 500
The Nasdaq is an exchange, like the NYSE and the newly-created BATS. Unlike the NYSE, it also reports the performance of all the companies that it lists.
The Dow, the S&P 500, and the MSCI are indices that track the performance of selected stocks. These three indices track U.S. stocks, so tend to trend together, but they weigh stocks differently. The Nasdaq uses total market capitalization. It simply takes the share price and multiplies it by the number of shares issued—it doesn't matter whether a company has split its stock or not.
The "Dow" is the Dow Jones Industrial Average or "DJIA." It follows the stock prices of 30 companies selected by the editors of the Wall Street Journal to represent their industries. They tend to be large, well-known companies like Coca-Cola and Verizon.
The Dow weighs stocks with higher share prices more heavily than the Nasdaq does. That means that its performance will be swayed by companies that haven't split their shares and consequently have maintained higher stock prices.
The S&P 500 tracks the 500 most widely held stocks on the NYSE. The S&P 500 is broader. It gives a bigger representation of companies from various sectors and industry groups. Because it has more financial stocks than either the Nasdaq or the Dow, it hasn't performed as well as the other two since the 2008 financial crisis.
The S&P 500 also uses market capitalization, but it only counts publicly available shares. A company that has a lot of stock still held by a founding family member won't have as much sway.
The MSCI is short for "Morgan Stanley Capital International." It tracks stocks in global, frontier, and emerging markets. It also tracks other geographic sub-areas, such as the Gulf Cooperation Council, as well as global small-cap, large-cap, and mid-cap stocks.
Nasdaq Highs and Lows
The Nasdaq Composite reached a record high, closing at 14,138.78 on April 25, 2021. Starting in August 2020, it began setting new records and continued climbing steadily—despite a recession caused by the COVID-19 pandemic.
Technology companies have been crucial to delivering information, video-connection, and products to residents locked-down during the pandemic. These companies will remain important to the economy even as states lift restrictions.
On August 22, 2013, Nasdaq shut down all trading from 12:14 p.m. EDT to 3:25 p.m. EDT. The "flash crash" was caused when one of the NYSE servers had trouble communicating with a server at Nasdaq. The server provided data about stock prices. Despite several attempts, the problem couldn't be resolved, and the stressed server at Nasdaq went down.
Flash crashes are not the same as stock market crashes. They don't have the power to cause a recession. They don't even last long enough to cause a market correction.
Nasdaq also had a problem with the Facebook IPO, the second-largest in history. On May 18, 2012, trading of Facebook's initial stock offering was delayed for the first 30 minutes. Traders could not place, change, or cancel orders. After the glitch was corrected, a record of 460 million shares were traded, creating $500 million in losses for traders. Nasdaq admitted that the delay had been caused by technical errors.
On March 10, 2000, the Nasdaq reached its pre-recession high of 5,048.62. That was caused by the tech bubble. Irrational exuberance had driven the prices of any type of tech or Internet stock high above reasonable valuations.
The 2000 tech bubble was driven in part by the Y2K scare.
Most companies and many individuals bought new computer systems. They were afraid that old software might not be able to transition from dates that started with "19" to dates that started with "20." Many software systems only recognized the last two digits of any year. Computer and software manufacturers warned everyone to update their computer systems so they wouldn't fail at the stroke of midnight in the new millennium. This caused sales to soar, which made it seem that any tech-related company was sure to make a profit.
As it turned out, most computer systems were fine. Since everyone had just bought computers, demand was low, and orders for tech-related products plummeted. And so did the Nasdaq, which dropped to 1,114.11 when it closed on October 9, 2002.
How Nasdaq Affects the Economy
Nasdaq affects the economy in the three ways outlined below.
Benefit to Small Investors
Nasdaq allows small investors to own parts of successful technology companies. Without Nasdaq and the other stock exchanges, only large private equity investors and financial institutions could profit from America's free-market economy.
Markets Help Savers Beat Inflation
Investing in the stock market helps savers beat inflation over time. Stocks generally provide greater long-term returns than the average rate of inflation. However, they do carry a greater risk than savings accounts, because you could lose your principal.
Markets Help Businesses Fund Growth
Stocks also provide the capital for companies to grow large enough to gain a competitive advantage through economies of scale. Growing, successful businesses need capital to fund growth. The stock market is a key source. In order to raise money this way, owners must sell part of the company. To do so, they "take the company public" through an initial public offering (IPO) of the company's shares.
An IPO raises a lot of cash. It also signals that a firm is successful enough to afford the IPO process. The drawback is that the founders no longer entirely own the company—the stockholders do. Founders can retain a controlling interest in the company if they own 51% of the shares.
Stocks indicate how valuable investors think a company is. When stock prices rise, investors believe that earnings will improve. Falling stock prices mean that investors have lost confidence in the company's ability to profit.
Stock prices rise in the expansion phase of the business cycle. Since the stock market indicates confidence, a crash can devastate economic growth. Lower stock prices mean less wealth for businesses, pension funds, and individual investors. Companies can't obtain as much funding for operations and expansion.