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What Is the NASDAQ?

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NASDAQ

The entrance to the NASDAQ trading floor in Time Square Manhattan.

Photo: John Moore/Getty Images
Semiconductor

NASDAQ is known as the exchange for tech stocks.

Credit: Koichi Kamoshida/Getty Images
iphone

Apple comprises 8% of NASDAQ's total value.

Photographer: David Paul Morris/Bloomberg via Getty Images

Question: What Is the NASDAQ?

Answer: NASDAQ originally was the acronym for the National Association of Securities Dealer Automated Quotation system. NASDAQ was founded in 1971, and provided quotes for Over-the-Counter (OTC) stocks not listed on other markets. For that reason, it became associated in people's minds with technology stocks. It was originally founded by disgraced securities trader Bernie Madoff, who was also President of the NASDAQ Board.

Today, NASDAQ is the largest electronic equities exchange in the U.S. In 2008, it merged with OMX ABO, a Stockholm-based operator of exchanges located in the Nordic and Baltic regions. The new company, NASDAQ OMX Group, lists stocks of over 3,800 companies. It also offers trading in derivatives, debt, commodities, structured products and ETFs.

The NASDAQ company provides services to over 70 other stock exchanges in more than 50 countries. For example, it provides exchange technology, which helps in stock trading, clearing and regulatory solutions.

The NASDAQ OMX Group also offers public companies tools to help with investor relations, market intelligence, board relationships, and news dissemination. It helps them raise capital through the U.S. Rule 144A. This rule allows the immediate resale of private placement securities among qualified institutional buyers without requiring public registration.

NASDAQ Crashes

On August 22 2013, NASDAQ shut down all trading from 12:14 p.m. EDT to 3:25 p.m. EDT. It was caused when one of the NYSE servers had trouble communicating with a serve at NASDAQ. The server provided data about stock prices. Despite several attempts, the problem couldn't be resolved, and the stressed serve at NASDAQ went down. (Source: WSJ, NASDAQ in Fresh Market Failure, August 22, 2013; Bloomberg, NASDAQ Three Hour Halt Highlights Vulnerability in Marker, August 26, 2013)

NASDAQ was also criticized for 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 460 million shares were traded. It created $500 million in losses for traders. NASDAQ admitted it was caused by technical errors. For more NASDAQ failures, see Computer Bugs and Squirrels: A History of NADAQ's Woes, August 22, 2013)

NASDAQ Bubble

On March 10, 2000, the NASDAQ reached its all-time high of 5,048.62. That was caused by the tech bubble, when irrational exuberance drove the prices of any type of tech or internet stock high above reasonable valuations. In 1999, 65.9% of the NASDAQ were technology stocks, such as Cisco, Oracle and Qualcomm. Another 15.2% was telecom, with the remaining made up of consumer (5%), healthcare (6.2%), financials (4%) and others (3.7%). 

This bubble, itself, was driven by the Y2K scare. That's when most companies and many individuals bought new computer systems. They were afraid old software might not be able to transition from dates that started with "19" to dates that started with "20." That's because many software systems only recognized the last two digits of any year. Therefore, 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 look like 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. So did the NASDAQ, which dropped to 1,114.11 when it closed on October 9, 2002.

It hasn't yet recovered completely from its 2000 high. It reached  2,859.12 on October 31, 2007, before plummeting to 1,268.64 on March 9, 2009. It took until November 26, 2013 to close above 4,000.

The NASDAQ has become less reliant on technology stocks, now comprising only 44.8% of the total. Consumer goods, like Bed Bath & Beyond and Green Mountain, now make up 16.3% of the NASDAQ, while healthcare has grown to 13.9% of the total. However, hi profile tech companies, like Apple, Microsoft,  and Yahoo, continue to make their home on the NASDAQ. (Source: WSJ, Surging NASDAQ Pierces 4,000 Mark, November 27, 2013)

Difference Between Dow, NASDAQ and S&P 500

The main difference is that the NASDAQ is an exchange, much like the New York Stock Exchange, whereas the Dow and the S&P 500 are indices that track the performance of selected stocks. The NASDAQ reports on all the performance of all the companies that have listed with it.

When people refer to the Dow, they are referring to one of three indices, the Dow Jones Industrial Average. This 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 General Electric and Kraft Foods.

The S&P 500 tracks the 500 most widely held stocks on the NYSE. The S&P 500 tends to be broader, hoping to have a bigger representation of companies from various sectors and industry groups. Since 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.

Since all three indices track U.S. stocks, they pretty much trend together. However, since they use different approaches, there will be other variations that you should know about. The NASDAQ weights stocks according to total market capitalization. It simply takes the share price and multiplies it by the number of shares issued. Therefore, it doesn't matter whether a company has split its stock or not.

The S&P 500 is weighted like the NASDAQ, by market capitalization, with one important difference. It only counts publicly-available shares. Therefore, a company that has a lot of stock still held by a founding family member won't have as much sway. The Dow weights stocks with higher share prices more heavily. That means the Dow's performance will be swayed by companies that haven't split their shares, and thus have maintained higher stock prices. Article updated November 27, 2013

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