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What Is the Nasdaq Composite Index? Everything You Need to Know

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Written by Timothy Sykes
Updated 9/16/2023 8 min read

The Nasdaq Composite Index is one of the top stock market indexes, which people look to for the purposes of measuring market health and stock market activity. With its unique composition and weighting system, these listings offer critical insights into the technology sector and the overall United States economy.

Founded in 1971, Nasdaq Inc. introduced the Nasdaq Composite Index as a means to track the performance of the companies listed on its stock exchange. A significant number of these companies fall into the technology, media, and communications industries, including giants like Microsoft, Apple, and Alphabet. This distinctive focus makes the Nasdaq Composite Index a vital tool for investors looking to gain exposure to the tech sector.

Just knowing that the Nasdaq Composite Index exists isn’t enough. It’s like having a powerful computer without understanding its software or hardware. To truly make use of this tool, you need to understand how it works, what it measures, and how it differs from other indices, such as the S&P 500 or the Russell 2000 Index.

This article aims to provide that information, offering clear, concise, and factual insights into the workings of the Nasdaq Composite Index. Let’s get to the main points!

First Things First: What Is the Nasdaq Composite Index?

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The Nasdaq Composite Index is a market capitalization-weighted index, which means that the value of each company within it contributes to the index based on its market cap. Larger companies like Apple (AAPL), Alphabet Class A (GOOGL), and Alphabet Class C (GOOG), have a greater impact on the index’s overall performance than smaller companies.

This index is home to a multitude of industries, but technology companies hold a significant sway, given their substantial market caps. That’s not to say that other sectors don’t have representation — consumer, cyclical and non-cyclical companies, semiconductor firms, and even REITs are constituents of the Nasdaq Composite.

The Nasdaq Composite Index is a key player in the world of stock market indices. These indices offer a window into the performance of various sectors of the market, helping investors make informed decisions. If you’re looking to broaden your understanding of these tools, our comprehensive guide on stock market indices is a great place to start.

How Does the Nasdaq Composite Index Work?

Unlike a traditional exchange, the Nasdaq Composite Index operates entirely electronically — a technology-based trading system that mirrors its tech-centric composition. This system of computer and networking technology allows for efficient, real-time trading and tracking of the index.

This composite works by tracking the value of the shares of its components and calculating an average, with larger companies wielding more influence due to their higher market capitalization. The price of the Nasdaq Composite Index is regularly updated, giving investors up-to-date information on the index’s performance and an indication of the overall health of the market.

What Does It Measure?

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The Nasdaq Composite Index measures the performance of the companies listed on the Nasdaq stock exchange. It’s a broad-based index, incorporating various sectors. However, it’s heavily skewed towards the technology sector, making it an excellent barometer of the performance of tech stocks and, by extension, the tech industry as a whole.

From mega-caps like Apple (AAPL) and Alphabet (GOOGL, GOOG) to smaller up-and-coming companies, the Nasdaq Composite Index provides a broad view of the market. Its performance is influenced by several factors, from economic data and mortgage rates to news about individual companies.

The Nasdaq Composite isn’t the only index that investors should keep an eye on. The S&P 500, for example, offers a broader view of the market, encompassing a wide range of companies. If you’re interested in exploring the potential benefits of investing in the S&P 500, check out our detailed guide on the subject.

I’ve made $7.4 million in my career thanks to the penny stocks I’ve traded, but that doesn’t mean I ignore the results of the bigger market-cap stocks covered in these indices. I use them to understand market sentiment, which gives me a feel for how tight a leash I should keep on my trades.

What Are the Different Types of Companies in the Nasdaq Composite Index?

The Nasdaq Composite Index is quite diverse, hosting companies from various sectors. While technology companies like Microsoft, Apple, Alphabet, and others dominate the index, other sectors are also well-represented. Consumer, cyclical and non-cyclical companies like Amazon (AMZN) and Costco Wholesale, semiconductor manufacturers like Nvidia (NVDA) and Broadcom (AVGO), and even telecommunication giants like Qualcomm are part of this index.

How Do Companies Get Listed in the Nasdaq Composite?

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Getting listed in the Nasdaq Composite isn’t a walk in the park. Companies need to meet certain financial, liquidity, and corporate governance requirements. Editors look for a minimum market capitalization, specific trading volume criteria, and adherence to Nasdaq’s corporate governance rules.

Companies like Meta Platforms (formerly Facebook), Intel, and PepsiCo (PEP) have all met these stringent requirements to get listed on the Nasdaq Composite Index.

How Can I Invest in the Nasdaq Composite Index Companies?

Investing directly in all companies listed on the Nasdaq Composite Index is impractical for most investors. But don’t worry — there’s a more straightforward way: index funds and ETFs. These financial tools allow you to invest in a broad cross-section of the market with a single purchase.

Fidelity Nasdaq Composite Index Fund (FNCMX) and Fidelity Nasdaq Composite Index Tracking Stock (ONEQ) are two popular choices. Another is the Invesco QQQ ETF (QQQ), which tracks the Nasdaq-100, a subset of the Nasdaq Composite.

The Major Differences Between Nasdaq Composite and the S&P 500

When comparing indices, the Nasdaq Composite and the S&P 500 often come up. They both measure the performance of U.S. companies, but they have significant differences. The S&P 500 consists of 500 large-cap companies from various exchanges, while the Nasdaq Composite includes all the companies listed on the Nasdaq exchange, making it broader in scope.

Another major difference lies in their composition. The S&P 500 is a blend of multiple industries, while the Nasdaq Composite is heavily skewed towards technology and growth-oriented companies.

Another index that often comes up in these discussions is the Dow Jones Industrial Average. The Dow Jones tracks a much more select group of companies, offering a different perspective on the market. To learn more about the Dow Jones Industrial Average and how it compares to the Nasdaq Composite, check out our article on the Dow Jones.

Key Takeaways

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The Nasdaq Composite Index is one of the major options in indexing-type derivatives and mutual funds. Its unique focus on technology stocks and its broad representation of various industries offer insights into the overall state of the market, particularly the tech sector. By understanding its content and what it measures, you can make more informed trading decisions.

Trading isn’t rocket science. It’s a skill you build and work on like any other. Trading has changed my life, and I think this way of life should be open to more people…

I’ve built my Trading Challenge to pass on the things I had to learn for myself. It’s the kind of community that I wish I had when I was starting out.

We don’t accept everyone. If you’re up for the challenge — I want to hear from you.

Apply to the Trading Challenge here.

Trading is a battlefield. The more knowledge you have, the better prepared you’ll be.

Does the Nasdaq Composite Index fit your trading strategy? Let me know in the comments — I love hearing from my readers!


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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (205) 851-0506 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”