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What is NASDAQ?

nasdaq
The NASDAQ's only physical presence is the MarketSite in Times Square in New York City.
Credit: SeanPavonePhoto / Shutterstock.com

The NASDAQ Stock Market is an American stock exchange designed to enable investors to buy and sell stocks on an automatic, transparent and speedy computer network. Also known simply as the NASDAQ, which originally stood for the National Association of Securities Dealers Automated Quotations, its 1971 creation offered an alternative to the in-person stock transaction system, which the NASD believed burdened investors with inefficient trading and delays.

Makeup of the NASDAQ

The NASDAQ now contains about 3,200 publicly traded companies, and is the second largest stock exchange (in terms of its securities' values) and the largest electronic stock market. The NASDAQ trades shares in a variety of types of companies — including capital goods, consumer durables and non-durables, energy, finance, healthcare, public utilities, technology, and transportation — but it is most well-known for its high-tech stocks.

To be listed on the NASDAQ National Market, companies must meet specific financial criteria. They must maintain a stock price of at least $1, and the value of outstanding stocks must total at least $1.1 million. For smaller companies unable to meet the financial requirements, there is the NASDAQ Small Caps Market. NASDAQ will shift companies from market to market as eligibility changes.

Trading on the NASDAQ

Because it is an electronic exchange, the NASDAQ offers no trading floor. The exchange itself is a dealers' market, so brokers buy and sell stocks through a market maker rather than from each other directly. A market maker handles a specific stock and holds a certain amount of stock in his or her books. When a broker wants to purchase shares, he or she does it directly from the market maker.

When the NASDAQ first began, stock trading took place over a computer bulletin board system and over the telephone. Now, trading on the NASDAQ occurs using automated trading systems, which offer full reports on trades and on daily trading volumes. Automated trading also offers automatic execution of trades based on parameters set by the trader.

The listing fees on the NASDAQ are significantly lower than other stock markets, with the maximum price set at $150,000. This low fee enables the trading of many new, high growth, and volatile stocks.

While the New York Stock Exchange is still considered a bigger exchange because its market capitalization is much higher, the NASDAQ has a greater trading volume than any other U.S. exchange, with approximately 1.8 billion trades per day.

With no trading floor, NASDAQ built the NASDAQ MarketSite in Manhattan's Times Square to create a tangible physical presence. The large outdoor electronic display gives current financial information on the tower 24 hours a day. Trading takes place Monday through Friday, 9:30 a.m. to 4 p.m. Eastern time, except for major holidays.

NASDAQ indexes

Like any stock exchange, the NASDAQ uses an index, or a collection of stocks that are used to deliver a market performance snapshot. The NYSE offers the Dow Jones Industrial Average (DJIA) as its primary index, and NASDAQ offers the NASDAQ Composite and the NASDAQ 100.

The NASDAQ Composite Index measures the change in more than 3,000 stocks traded on NASDAQ, whereas the DJIA measures the peaks and troughs of 30 big companies. The NASDAQ Composite is often referred to as just "the NASDAQ" and is the index most often quoted by financial journalists and reporters.

The NASDAQ 100 is a modified capitalization-weighted index made up of the 100 largest companies in market value that trade on the NASDAQ. These companies cover a range of market sectors, though the largest are generally technology-related. Companies can be added and removed each year from the NASDAQ 100 depending on their market value.

Both the NASDAQ Composite and the NASDAQ 100 include companies incorporated outside of the United States, as well as American companies. This differs from other major indexes, as the DJIA does not include foreign companies.

History of the NASDAQ

Founded by the National Association of Securities Dealers, the NASDAQ opened on Feb. 8, 1971. The world's first electronic stock market began by trading more than 2,500 over-the-counter securities. At the time, the NASDAQ was a computer bulletin board-type system. At first, no actual trading took place between buyers and sellers. Instead, the NASDAQ evened the traders' odds by narrowing the spread between the bid price and ask price of stocks.

Thanks to its tech-heavy nature, the NASDAQ Composite took a major hit after the dot-com bubble burst of the late 1990s, dropping from over 5,000 to below 1,200. Other notable dates on the NASDAQ timeline include:

1975 – NASDAQ invents the modern IPO (Initial Public Offering) by listing venture-capital-backed companies and allows the underwriting syndicates to trade as market makers.

1985 – NASDAQ creates the NASDAQ-100 Index.

1996 – The first exchange website, www.nasdaq.com, goes live.

1998 – NASDAQ merges with the American Stock Exchange to form the NASDAQ-AMEX Market Group. (AMEX was acquired by NYSE Euronext in 2008 and its data was integrated into the NYSE.)

2000 – NASDAQ membership votes to restructure and spin off NASDAQ into a publicly traded shareholder-owner for-profit company, the NASDAQ Stock Market, Inc.

2007 – NASDAQ acquires OMX, a Swedish-Finnish financial company, and changes name to the NASDAQ OMX Group. NASDAQ OMX buys the Boston Stock Exchange.

2008 – NASDAQ OMX buys the Philadelphia Stock Exchange, the oldest stock exchange in the United States.

2009 – NASDAQ OMX creates a mobile Web version of nasdaq.com, an industry first.

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