NASDAQ is an abbreviation for the National Association of Securities Dealers Automated Quotations. It is the second-largest stock exchange in the world, right after the New York Stock Exchange (NYSE). Trading here is an electronic process instead of on the standard physical trading floor.
This technique allows investors to trade securities through a transparent and computerized system. It has done away with the need for brokers and auction-style trading.
How Does the NASDAQ Work?
The NASDAQ has three market tiers. They are:
- Global Select Market: This measures the stocks of both international and domestic companies. It uses the market capitalization index to perform its functions.
- Global Market: This is a mid-cap market and is not as exclusive as the Global Select Market. It comprises the stocks of listed companies in the US and international companies.
- Capital Market: It is an equity market for companies with low levels of market capitalization. Another name for it is small-cap. The listing requirements here are not as strongest as other NASDAQ markets.
For your company to trade on the NASDAQ stock market, it must meet the requirements of one of the tiers. Some of the general listing requirements are:
- The company must register with the Securities Exchange Commission (SEC).
- It needs to have at least three market markers.
- The company must meet requirements relating to its size and trading volume.
Once you have satisfied these requirements, you can apply. This may take between four and six weeks for approval.
History of the NASDAQ
The NASDAQ started in 1971 as one of the first businesses to start online operations. It provided listing services for companies that operated only over-the-counter in the past. In 2006, it started trading on its own as a national securities exchange. Then, in 2007, it merged with OMX which resulted in the Nasdaq OMX group.
With time, it added new systems for trading and other transactions. The absence of a physical trading floor posed a problem in the earlier years. It meant the absence of ceremonies or space for media houses to broadcast on trading days.
They resolved this problem in 2000 after the building of a building in New York, known as the Market Site. Additionally, this helped it to gain credibility with Wall Street while maintaining its electronic trading mechanism.
What Does It Measure?
It measures the prices of securities that get traded on the NASDAQ stock market. In short, it is a broader measure of market activities then other systems.
This system is weighted based on market capitalization. Essentially, this means is that the companies with higher market values have a great influence on the index.
It is easy to calculate the value of market capitalization, you only need to multiply existing shares by the recent sales price. Say a stock XYZ has 2 million shares and this share price increases by $3. If stock ABC has the same $3 increase, but has less share quantity, this price increase will not have the same impact it did on stock XYZ.
This market capitalization calculation goes on throughout the trading day in this index. Moreover, it is calculated and reported once every second.
How Does the NASDAQ Make Money?
The bulk of NASDAQ money comes from fees. For instance, companies pay listing fees to appear on the stock exchange platforms. Additionally, investors pay transaction fees to enable them to trade. Lastly, users pay service fees to enable them to access relevant market data.
The NASDAQ provides its products and services under four segments. These are:
- Market Services
- Corporate Services
- Information Services
- Technology Solutions
How Do I Invest in the NASDAQ?
Buying individual stocks is a stressful process. A better option is to invest in an index fund like the NASDAQ composite index.
To invest in this index, you can go through two ways:
Mutual Funds: Here, a company adds your cash to money from other investors to buy securities. The procedure is to diversify by investing in many securities at once.
As an investor, you have shares in this fund managed by professionals. The investment minimums are low.
ETF: This is like mutual funds because it lets you pool your money with other investors. However, the difference is that it trades on a national stock exchange at market prices. This may or may not represent the net asset value of the shares.
Now you understand the options available to you, let us look at the steps you will follow next.
- First, you must choose your target index investment. Like we said earlier, you can invest in either mutual funds or ETFs.
- After this, research the funds that are performing well. Also check the trading times, investment minimums, and order types.
- The next step is to buy shares of either mutual funds or ETFs. Use your current account to do this. The process is simple, log into your account and search for your index fund of choice. Then, select the number of shares you want and set up an automatic contribution.
- Lastly, you can use a brokerage account to invest in index funds as an alternative step. This is if you don’t have access to a retirement account.
What Is Market Capitalization?
Market capitalization is the total value of a company’s stock or shares. It assists investors in understanding the worth of a company in the open market. Also, it shows them the possible potential for investment or lack of.
For instance, larger companies present safer investment options because they have stability. Smaller companies or startups come with heavy risks but may present rewards as they grow. Calculating this market capitalization is straightforward. You only need to multiply the price of a stock by the total outstanding shares.
There are three tiers of market capitalization as follows:
Global Select Markets
This is an exclusive composite with very stringent financial and other requirements. Its criteria are more rigid than other tiers because it seeks to protect the investors.
To qualify, your company must meet the following standards four standards: earnings, capitalization with cash flow, capitalization with revenue, and assets with equity.
In order to meet standard liquidity requirements, it depends if your company has any of the following :
- An Initial Public Offering (IPO)
- A Spin-Off
- Is already trading common stock
Global Market
This market represents companies without the financial strength for the Global Select Market. It is a portfolio of securities by companies that meet the NASDAQ under this heading. This is a lot less exclusive than the Global Select Markets.
Capital Market
This market covers the securities of small-cap companies that trade on NASDAQ. The listing requirements for this category are the least stringent. This is because these companies need to raise more capital. These companies have low levels of market capitalization.
What Companies Are in the NASDAQ?
NASDAQ is one of the exclusive stock exchange clubs. This means that they won’t allow any random company to trade on their platform. To be a part of it, your company must have a solid history with a good management team. Some companies that are part of NASDAQ are Microsoft, Apple, and Amazon.
Here are some of the criteria your company must meet, to join:
- At least 1,250,000 public traded shares.
- The regular bid price of shares must be at least $4 at the time of listing
- Presence of three or four market markers for the stock.
- Payment of an application fee of $25,000 before consideration for listing.
You can find all the rules and other requirements on the official platform.
Security Criteria
In order for a security to qualify it must fit some of the following criteria to show its eligibility. Firstly, it must have an exclusive listing on the NASDAQ STOCK exchange site. Secondly, itt must be one of the following securities:
- Ordinary Shares
- Common stock
- Share of beneficial interest
- Trading stock
- Real Estate Investment Trusts
- American Depositary Receipts
What Is the Difference From the NASDAQ, S&P 500, and Dow Jones?
The S&P 500 is a creation of Standard & Poor in 1962. It is the broadest measure of the United States economy. To get the index value, it weighs every company according to its market capitalization. Then, apply a divisor set by S&P to get the final value.
On the other hand, the Dow Jones is one of the oldest and most well known indexes. It is different from the S&P 500 and NASDAQ because its industrial ranking average is by the share price. In this index, an added divisor creates the final value.
The NASDAQ is the youngest of the indexes in this mix. In comparison to the others, it is the most technologically driven and measures the market capitalization off of its components.
Let us look at the major trading difference between them.
- S&P 500 is the least affected stock.
- The performance of individual stocks is what impacts Dow Jones.
- NASDAQ has a broader reach than Dow Jones and the impact of its smaller stock is quite clear.
Why You Need a Financial Advisor
If you growing a business, NASDAQ will help you to keep costs low. This will in turn maintain more capital that will fuel growth. It is not surprising that companies that seek growth and expansion choose to list on NASDAQ. If you want to make positive investments for your business, get listed today.
While NASDAQ has great profit potential, you need the right guidance. A financial advisor will keep you on track and prevent you from making emotional decisions over your money. Financial advisors can help advise you to make the right investment decisions with your money.