Introduction to the NASDAQ 100

The Nasdaq-100 (NDX) is a stock index which is used to measure the performance of 100 companies that are listed in the Nasdaq stock market. The term Nasdaq means National Association of Securities Dealers Automated Quotations and the 100 index is a group of companies within this network.

The index's measurement focus is on technology, retail, telecommunications and bio-technology companies and is therefore a metric that reflects the stock performance of these economic sectors. There are also several other Nasdaq 100 indexes such as the Nasdaq 100 Technology Sector Index and the Nasdaq Financial 100 Index.

History of the Nasdaq 100

The Nasdaq-100 started operation on January 31, 1985 or 14 years after the Nasdaq's 1971 inception. Each year companies listed on the exchange are reviewed for specific requirements such as trading volume, market capitalization, financial health and other listing standards. During and after this process old companies may be removed from the Nasdaq 100 listing and new companies may be added.

Some of the companies listed on the exchange are older companies while others are newer. A few of these companies are Intel Corporation, Sears Holdings Corporation, Cisco Systems and Ebay Inc. Since its beginning the Nasdaq 100 Index value has increased from 115.48 in 1985 to 1988.31 in 2007.

How the Nasdaq 100 is calculated

The Nasdaq 100 index is an ever-changing value that uses a "Modified Market Capitalization Weighted Index" value in its calculation. The exact formula is (Aggregate Adjusted Market Value/ABPMV) X Base Value . What this means is the index is weighted based on share weights as well as stock prices and a filter variable known as the "Adjusted Base Period Market value".

This allows the final index value to be more accurately proportionate to the size of each company's individual influence on the index. For example, if Company A has 1000 more shares than Company B and both are valued at $20.00, then Company A is weighted more heavily in the index calculation than Company B would be because of its share volume. A normal average would not account for this size difference but would be an average of stock prices only.

Uses of the Nasdaq 100 Index

The Nasdaq 100 Index is a useful index just like other indexes are. Due to its unique nature as a Nasdaq index one can be assured it is more likely to contain technology stocks and therefore be at least a partial indicator of technology sector performance. To really know what is being measured it is best to look at a complete listing of the companies within the index. A list of these companies is available on the Nasdaq link provided at the bottom of this article. Some additional uses of the Nasdaq 100 index are as follows:

• Prestige for companies chosen to be on the index.
• Assessment tool for brokers, analysts, economists and investors.
• Marketing and performance metric for the Nasdaq Stock Market
• Indicator of specific sector performance such as retail and technology.

To summarize, The Nasdaq 100 Index or NDX is one of several Nasdaq provided indexes used in the measurement and assessment of corporate, economic and stock market achievement. Companies listed on this index are dependent on several key requirements mandated by the Nasdaq stock exchange and this can cause old companies to be removed and/or new companies to be added to the index.

The index is a weighted average index meaning it takes into account more than one variable in its calculation, specifically shares outstanding and stock price. The Nasdaq 100 index only measures the performance of companies within specific sectors of the economy such as technology, retail and biotechnology. The indexes performance over time has been positive and its uses include but are not limited to marketing, sector assessment, financial health and corporate reputation.

Sources:
1. http://dynamic.nasdaq.com/dynamic/nasdaq100_activity.stm
2. http://en.wikipedia.org/wiki/NASDAQ-100
3. http://www.advfn.com/StockExchanges/history/NASDAQ/NASDAQ.html
4. http://www.nasdaqtrader.com/trader/defincludes/N100IndexMethod.pdf