What is the Nasdaq Index? Everything You Need to Know

The Nasdaq Composite Index, colloquially known as the Nasdaq, is a bellwether for the U.S. stock market, especially the technology sector. Launched in 1971, the Nasdaq covers over 3,000 companies listed on the Nasdaq stock exchange, from heavyweight tech giants like Apple to emerging startups.

Understanding the Nasdaq

While the Nasdaq Composite encompasses a wide array of companies, its identity is strongly tied to the tech industry. This market-capitalization-weighted index uses the market value of companies to determine their significance, leading to heightened sensitivity to tech giants' movements.

What about the Nasdaq 100?

The Nasdaq-100 Index, a subset of the broader Nasdaq Composite, zeroes in on the 100 largest non-financial companies in the Nasdaq Composite. Often perceived as a tech index, the Nasdaq-100 hosts giants such as Apple, Microsoft, and Amazon, reflecting the tech industry's most influential players.

Which Stocks are in the Nasdaq? The Prime Contenders

The Nasdaq's vast array includes some of the most impactful tech firms globally. To sample, look no further than the leading components of the Invesco QQQ Trust ETF, which mirrors the Nasdaq-100 Index, making Apple, Microsoft, and Amazon its familiar leaders. Take a look at QQQ’s top 10 holdings below (as of September 25, 2023). If you’re unfamiliar with ETFs, check out this ETF article here.

As you can see, Apple (NASDAQ:AAPL) stock currently makes up over 11% of the Nasdaq 100, meaning that for every $100 invested in the QQQ ETF, $11.07 currently go toward AAPL stock.

Delving Deeper: Inside the Nasdaq's Mechanics

The Nasdaq weighs its components based on market capitalization, which is calculated by multiplying a company's stock price with its number of outstanding shares. The aggregated market cap of all entities gives the overall Nasdaq market cap.

Beyond the Nasdaq: A Glimpse at Its Counterparts

The Nasdaq's tech-heavy emphasis contrasts with other indices. The S&P 500 provides a broader market view, encompassing leading U.S. companies across sectors. The Dow Jones Industrial Average, meanwhile, homes in on 30 blue-chip firms.

Distinguishing the Nasdaq from its Competitors

S&P 500: Encompassing leading U.S. firms across sectors, the S&P 500 is a favorite for its broad market representation. Learn more about the S&P 500 here.

Dow Jones Industrial Average (DJIA): Consisting of only 30 entities, the DJIA is price-weighted, in contrast to the Nasdaq's market-cap weighting.

Russell Indexes: These indices, especially the popular Russell 2000, spotlight smaller enterprises, capturing a snapshot of the smaller U.S. public firms.

The Nasdaq's Limitations — Heavy Tech Exposure

With its dominant tech exposure, the Nasdaq can be more volatile, especially during tech industry disturbances. The heavy reliance on major tech stocks can sometimes skew its true market representation, underscoring the importance of diversification.

As you can see below, the tech sector made up over 57% of the QQQ ETF (as of June 30, 2023), meaning that more than half of your money would go toward tech stocks if you chose to invest in the fund.

Investing in the Nasdaq

While direct investment in the Nasdaq isn't possible, ETFs like the Invesco QQQ Trust (QQQ) mentioned above offer a means to mirror its performance. These ETFs can easily be bought on a brokerage account the same way you’d buy a stock.

Final Words

With its firm grip on the tech industry, the Nasdaq offers a unique vantage point of the U.S. equity market. As the tech era accelerates, grasping the Nasdaq, including its subsets like the Nasdaq-100, becomes imperative for astute investors.