You will see the current values for the three major stock indexes, the Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite, on the Home page of any major financial website. As the youngster of the major stock indexes, the NASDAQ Composite is often viewed as an indicator for the newer sectors of the economy. It includes securities listed on the NASDAQ exchange, which is one of the major U.S. stock exchanges and traditionally includes tech companies and other new and trendy businesses.
The NASDAQ composite is composed of over 2,500 securities listed in the NASDAQ exchange. While the NASDAQ composite index, sometimes called the NASDAQ average, is based on prices from the NASDAQ stock exchange, the index and exchange are technically two distinct things.
Introducing the NASDAQ Stock Exchange
The two major stock exchanges in the United States are the NYSE Euronext and the NASDAQ. The NASDAQ launched in 1971 to provide electronic and listing services for companies that had been trading over-the-counter, not on any exchange. The NASDAQ became the listing place for many of the new and innovative companies of the high tech era.
Companies such as Intel, Microsoft and Apple initially raised money by listing on the NASDAQ and remain on the exchange today. The NASDAQ Composite stock index is designed to track the value changes of the full NASDAQ market.
NASDAQ Composite Components
The NASDAQ Composite index includes almost every security listed in the NASDAQ exchange, over 2,500 in total. Included in the index are all listed common stocks, limited partnerships, real estate investment trusts and American Depository Receipts. Not included in the index are any closed-end funds, exchange-traded funds, convertible securities, preferred shares or derivative securities listed on the exchange. The NASDAQ Composite is classified as a broad-based stock market index.
Understanding NASDAQ Composite Weighting System
The NASDAQ Composite tracks the stocks in the index with a market capitalization weighting of each security in the index. This Nasdaq composite weighting policy means the larger companies listed on the NASDAQ exchange have more influence over the index value than the smaller companies.
Traditionally, tech stocks have made up a large portion of the NASDAQ composite, with larger tech companies especially influencing the total composite index.
Composite vs. NASDAQ 100
There are two NASDAQ exchange focused stock indexes: the NASDAQ Composite and the NASDAQ 100. It is important to understand which one is being discussed. The NASDAQ 100 index tracks the 100 largest non-financial stocks listed on the NASDAQ exchange. The NASDAQ Composite index is the most widely followed of the two by general market participants. The NASDAQ 100 is very focused on the technology sector, and is a widely-held tracking index for futures, options and exchange-traded fund trading.
Other Market Indexes
Other commonly watched market indices include the Dow Jones Industrial Average, the S&P 500 and the Russell 3000 index.
The Dow Jones Industrial Average, often simply called the "Dow," is based on 30 top U.S. stocks. It is one of the most commonly cited metrics of the stock market's overall performance. The S&P 500 includes 500 large capitalization U.S. stocks. The Russell 3000 index includes, as the name suggests, 3,000 stocks, including the bulk of major stocks traded on U.S. markets.
Other indexes track different sectors of the economy or sectors overseas. Some investors put money into index funds, which invest in stocks based on their placement on various indexes. These can track the performance of the market as a whole and often carry lower fees for comparable performance versus funds that rely on human experts to pick stocks.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.