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

What is The NASDAQ?

Nasdaq was born in 1971 as the United States' first automated exchange system for stock market securities. In other words, the Nasdaq is an electronic stock market that does the same things as the New York Stock Exchange only with an emphasis on technology. Since its inception, Nasdaq has grown in size and is now one of the United States' largest and most competitive stock exchanges.

Image source: Victoria Peckham

• Stocks listed on Nasdaq

There are currently approximately 3200 company stocks listed on the Nasdaq stock exchange, 335 of which are foreign companies. Many of these companies are technology stocks such as information technology and telecommunications firms, however other economic sectors are represented in this exchange including financial services, retail and transportation companies. While technology stocks are not the only stocks listed on this exchange they do form a large part of the companies traded on this exchange.

• Regulation of Nasdaq

The Nasdaq stock exchange is regulated by the Securities Exchange Committee (SEC). The SEC regulation of Nasdaq and other exchanges centers around the following areas:

1. Assisting public investors in having fair access to investing opportunities
2. Ensuring competitive pricing among exchanges through inter-linking of them.
3. The prevention of fraud and stock manipulation.
4. Limiting risk to investors coming about through technological mishaps.

Recently, the regulatory environment has favored individual investors in terms of financial information. In 1996 an SEC ruling allowed greater individual access to financial information previously only made available to financial institutions. This has led to a larger volume and more favorable investing environment to individual investors. What's more, as of 2000 the 1996 ruling was enhanced. In the SEC's 2000 'fair disclosure' ruling required the distribution of sensitive financial information made available to large brokerage firms to be simultaneously available to individual investors.

• The competitiveness of Nasdaq

Nasdaq has become one of the leading U.S. stock exchanges and currently trades a greater volume of electronic shares per day than any other U.S. stock exchange. Due to its technologically savvy positioning, Nasdaq has been able to secure increasing market share over the last decade. It is currently gaining momentum in the exchange of shares listed on the New York Stock Exchange, specifically it traded 14.9% of NYSE shares as of January 2007.and allows for enhanced electronic features in the trading process according to Nasdaq's Chief Economist. It is believed this faster and more efficient trading platforms allows brokerage firms and Inevestment banks to gain an edge in the trading process. In 2006 Nasdaq bought nearly 3.5 million shares of the London Stock Exchange (LXE) and subsequently placed bids to purchase a majority stake in the exchange in 2007.

• The future of Nasdaq

The future of Nasdaq looks promising. It has a strong brand equity that meets the needs of an increasingly technological world and business environment. Recent developments and trends in stocks traded on the Nasdaq point to its future performance. Also, as a major U.S. stock exchange it is a market leader and therefore enjoys the fiscal benefits of economies of scale which will assist in its future competitiveness.

To summarize, the Nasdaq stock exchange is an electronic stock exchange that emerged alongside an increase in the distribution of computer technology. As information systems have developed, the Nasdaq has become more sophisticated and consequently has gained market share making it more competitive. The Nasdaq is poised for increased amounts of trading volume and a greater amount of corporate listings in the future. The Nasdaq is regulated by the Securities and Exchange Commission which is a U.S. government entity and this organization helps level the playing field for smaller investors.

Sources:

1. http://www.nasdaq.com/newsroom/news/pr2006/ne_section06_046.stm
2. http://www.sec.gov/rules/extra/regmark.shtml
3. http://www.nasdaq.com/reference/nasdaq_facts.stm
4. http://invest-faq.com/articles/regul-sec-nasdaq.html
5. http://findarticles.com/p/articles/mi_qa3715/is_200010/ai_n8912892
6. http://www.nasdaq.com/reference/NASDAQ%20Market%20Structure%20Bulletin.pdf