The NASDAQ 100 Market Overview
The NASDAQ 100 index (or NDX100) is one of the most popular stock indices in the world. The index lists companies from around the world (although primarily based in the U.S.) with the largest capitalization and prospects for future growth.
NASDAQ stands for the National Association of Securities Dealers Automated Quotations and refers to a stock exchange that was established in 1971 as the world’s first ever completely electronic stock market.
It is a trading index that operates within the NASDAQ stock exchange ecosystem. It hosts a number of trillion-dollar plus companies such as Apple, Alphabet (Google), Amazon, and Microsoft. In total, the index includes 101 of the largest US and international companies listed on the NASDAQ Stock Exchange.
In this guide, you’ll learn exactly what the NASDAQ 100 is, how the price movements work, the benefits of trading on it, and some valuable pointers on how to trade in NASDAQ 100 stocks.
What Is The NASDAQ 100 (NDX) Index?
Before we dive into the mechanics of trading in the NASDAQ 100, it is a good idea to get a more detailed overview of what the index is, rather than just a surface level understanding.
The NASDAQ-100 is a stock market index made up of 102 equity securities from 101 of the biggest non-financial companies listed (mostly operating in technical industries) on the NASDAQ stock exchange.
The 102 securities listed on the NASDAQ 100 index are some of the most actively traded in the world, with a mind-blowing $16 trillion market capitalization.
The NASDAQ100 index was launched in 1985 and has evolved to become a powerful and high-performing stock market index over the past four decades.
A Brief History of The NASDAQ 100
On January 31st, 1985 Nasdaq first launched the NASDAQ 100 index list, and it became the world’s first electronic exchange. The index has since seen massive growth. The computer and digital revolution of the past 40 years has seen new and emerging businesses grow in size and value.
Between 2000 and 2022, the Nasdaq-100 has yielded an annualized average return of 6.06%. However, the index is known to be significantly more volatile than other indices such as the S&P 500 due to the high proportion of emerging technology businesses, as opposed to older, more stable industries such as finance and oil.
The index was hit hard in the early 2000s when the dot-com bubble burst. Over the course of two years, the NASDAQ 100 lost more than 30% of its market cap. Between 2012 and 2020, there was a resurgence and the index experienced a strong bull run that outperformed the S&P 500.
The NASDAQ Index Listing Criteria
In this section, we’ll describe the criteria needed for a company to get listed on the NASDAQ 100 index. The following is a brief overview of the criteria that a company must meet to become listed on the NASDAQ stock market index. The company must:
– Be listed on the global market NASDAQ exchange
– Publish quarterly and annual reports
– Not be filed as bankrupt or in the process of going bankrupt
– Have been publicly traded for at least three months.
If you are interested in finding out more about the NASDAQ qualification criteria, you can download an initial listing requirements guide in a PDF format from the NASDAQ website.
As mentioned earlier, the NASDAQ 100 is considered to be a tech-heavy index. However, it is a mistake to think that all of the companies listed are technical. The index is mainly made up of technical and engineering companies, but it also represents more diverse businesses in a variety of industries such as customer service, healthcare, public services, etc. At the time of writing, tech companies make up 56% of the NASDAQ-100 index market revenue.
The financial sector is not included in the list of NASDAQ 100 companies, as stated earlier. Instead, a special index was launched alongside the NDX called the NASDAQ 100 Financial Index (IXF).
How Does The NASDAQ 100 Work?
The NASDAQ 100 simply provides a way to automatically list the top 100 non-financial companies from the Nasdaq Exchange listings. The listings are placed in descending order of total market cap. The overall Nasdaq exchange comprises over 3,000 companies.
A common misconception is that the NASDAQ 100 only lists companies based in the USA. In fact, foreign companies are also listed in the NASDAQ 100 index. However, the index is mostly made up of U.S. companies, as they generally have the biggest market caps.
For a foreign company to be listed on the NASDAQ they must offer a negotiable security known as American Depository Receipts (ADR).
The NASDAQ 100 index’s primary function is to measure and monitor movements in the total value of all the 100 companies in the index.
As the share prices increase and decrease, it immediately reflects on the index price. The overall price moves on a macro level because of the large number of companies listed on the index. In other words, a small change in the index price may represent a significant change in individual securities since the index takes a weighted average of all 100 companies.
Does The NASDAQ-1OO Index List Change?
The NASDAQ 100 list of companies is not static. The index changes annually on the third Friday in December, when a reranking comes into effect. Prior to the change, NASDAQ reviews the index components and compares their value to those not in the index, then reranks companies based on these comparisons.
During the reranking, NASDAQ also checks to make sure that all the listed companies meet the criteria for inclusion. Underperforming companies, or companies that no longer meet the criteria, are replaced with companies that are performing well and show potential for future growth.
Quarterly rebalancing may take place if a single company is worth 24% or more of the entire index or if 48% or more of the index is made up of companies that have a weighting 4.5% or higher.
Annual rebalancing takes place if a single company is worth 15% or more of the entire index or the top five companies hold a weighting of 40% or more.
How Is The NASDAQ 100 Calculated?
The Nasdaq uses a weighting system that ranks by the market capitalization of each company.
The total value of the index is calculated as a sum total of all the securities within the index, which is then multiplied by the most recent sale price, and finally divided by a figure known as the NASDAQ divisor. The NASDAQ divisor is a standardization figure which takes into account special dividends, stock splits, and buybacks, and ensures that these events don’t significantly alter the price-weighted market index.
What Events May Influence NASDAQ 100?
Stock market indices can be influenced by multiple factors. If you are considering investing or trading in the NASDAQ 100, it’s a good idea to understand these factors.
History – The NASDAQ-100 Index has a good track record of success compared to other indices. Although it has had a few bad periods, such as the early 2000s and 2008 to 2012, it has performed well over the period of its whole existence.
Company Performance – The NASDAQ 100 index lists 101 companies that work in slightly different industries and serve different markets. Therefore, it is inevitable that the performance of individual companies will affect the index. The success of each business will affect its share price and influence the amount of weighting it receives in the index. If the stock of a big company performs exceptionally well, the NASDAQ 100 index price is likely to follow. In contrast, if a company stock price drops significantly, the NASDAQ 100 index price is likely to be negatively affected too.
World Events – Wars, pandemics, political tensions, energy crises, and other world events affect the NASDAQ 100 index list. During periods of crisis and upheaval, the stock prices of individual companies may fluctuate wildly.
U.S. Economy – As mentioned earlier, most of the companies in the NASDAQ 100 are based in the USA. NASDAQ stock prices are deeply interwoven with the US economy, as well as global economic trends such as rising inflation and recession.
Currency Exchange Rates – Global exchange rates can have a big impact on index and stock prices. For instance, if the dollar weakens against other global currencies, the stock prices of companies may fall too, bridging the NASDAQ index price down.
Frequently Asked Questions
Is it a good idea to invest In The NASDAQ 100?
The NASDAQ 100 is seen as a strong investment opportunity in trading circles. The index has had a positive average annual return since its launch in the 1980’s. Due to the fact that NDX prioritizes technical companies that have strong growth potential, it has consistently outperformed the S&P 500 over the years.
Here are some factors that you should be aware of before investing in the NASDAQ 100 index.
The current digital technology boom bodes well for the NASDAQ 100 index that has a market cap made up of 56% technical companies.
The NASDAQ 100 has medium to high volatility levels, which means it can be a lucrative market for investment and trading, but there is a higher than average chance that investors may lose money over the short-term.
Leveraged products like CFDs (Contract for Difference) are available for traders who want to trade in the NASDAQ 100. CFDs tend to be higher risk, but they widen market exposure, which can lead to bigger opportunities.
How Do I Invest Or Trade In The NASDAQ 100?
You can invest in the NASDAQ 100 in a number of ways:
– Exchange Traded Funds (ETFs) and mutual funds – a simple in fast way to invest in NASDAQ listed companies
– Annuities – a low-risk way to invest in the NASDAQ 100 for long-term returns such as pension funds
– Options – the investor owns part of the company stock and can sell them or buy more at any time
– Futures – also known as derivatives, NASDAQ 100 futures allow investors to buy or sell stock and assets at a set time in the future for a set price.
What Other Major Global Market Indices Can I Invest In?
The NASDAQ 100 index is a well-established index with a good track record of success. However, it is more volatile than other market indices, so if you feel it doesn’t work for you, there are other market indices you may consider investing in.
– S&P 500
– S&P Global 100
– S&P Global 1200
– Dow Jones
– FTSE ALL World Index
– FTSE 100
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