What’s so special about the NASDAQ 100?
You’ll often hear technology investors talking about the NASDAQ 100, why is that? In the early 1970’s the NASDAQ exchange made history by becoming the first stock exchange to work electronically - it’s hard to believe that was only 50 years ago. The traditional NASDAQ index, the NASDAQ composite, was created when the exchange was created but what’s so special about the NASDAQ 100 index? In this article we will cover the following:
- How did the NASDAQ 100 begin?
- What’s the difference between the NASDAQ composite index and NASDAQ 100?
- How are companies selected for the NASDAQ 100?
- What’s so special about the NASDAQ 100?
How did the NASDAQ 100 begin?
First, What’s the NASDAQ?
Before we launch into discussing the origins of the NASDAQ 100 index it’s important to first understand the NASDAQ. NASDAQ stands for National Association of Securities Dealers Automated Quotations and was introduced as the world’s first electronic stock exchange in 1971. A decade after its inception the exchange claimed 37% of US stock market trades and 46% another decade later. In the early 2000s, the NASDAQ changed it’s status from a stock market to a licensed national securities exchange. IN 2016, Adena Friedman was promoted to CEO to become the first female to run a major exchange in the US.
NASDAQ Composite or NASDAQ 100?
These are the two most widely followed NASDAQ exchange indices. The NASDAQ composite is made up of approximately 2500 companies that are listed on the NASDAQ exchange, making up the bulk of total market capitalization traded on the exchange. Not included in the index are any closed-end funds, exchange-traded funds, convertible securities, preferred shares or derivative securities listed on the exchange. This index is known as the NASDAQ average and has been around since the NASDAQ stock exchange was founded.
In contrast, the NASDAQ 100 is an index that tracks the securities of the 100 largest companies listed on the NASDAQ exchange. However, the index excludes any financial firms such as commercial or investment banks (These are tracked in the aptly named NASDAQ Financial-100).
Which companies make up the NASDAQ 100?
How are companies selected for the index?
Ultimately, the NASDAQ 100 is the 100 largest non-financial companies by market capitalization that are listed on the NASDAQ exchange. Additionally, the NASDAQ has over the years put in place a series of stringent standards that companies must meet before being included in the index. Those standards include the following:
- Being listed exclusively on NASDAQ in either the Global Select or Global Market tiers.
- Being publicly offered on an established American market for three months.
- Having an average daily volume of 200,000 shares.
- Being current in regards to quarterly and annual reports.
- Not being in bankruptcy proceedings.
How often do companies change on the NASDAQ 100?
The NASDAQ-100 Index is a modified capitalization-weighted index. It means that stocks are weighted according to the total market value of their outstanding shares. As a company’s stock price changes, its stock index’s value changes as well.
However, the index is not rebalanced often. It occurs each year in December. When it is time for a rebalancing, Nasdaq will review the companies included, re-rank eligible companies, and make adjustments.
When they decide to review, Nasdaq will look at share prices and publicly announced share totals. Once they’ve been ranked, companies ranked 101st to 125th will only stay if they were in the top 100 in the previous year. However, if they are not able to move back into the top 100 that year, they will be dropped. If they are ranked over 125, they will be dropped regardless.
Which companies currently make up the NASDAQ 100?
As one might imagine, the top tech firms dominate the top of the NASDAQ charts. Microsoft and Apple are the top 2 companies, followed by Amazon, Alphabet, and Facebook. Here’s a list of the top 20 companies in the NASDAQ in 2020:
- Apple Inc
- Comcast Corp
- Cisco Systems
- Costco Wholesale
- Texas Instruments
- Charter Communications
You can check out the exact weightings of all the companies on the NASDAQ 100 here.
So, What’s So Special About the NASDAQ 100?
The NASDAQ 100 is known for its strong representation of the technology sector - approximately 50% of the index weighting is made up by tech companies. Given the ever-growing importance and influence of tech companies on the world and therefore the stock market, the NASDAQ 100 is seen as the indicator for the health of the technology industry in the US. It can be thought of signalling how well the US is innovating and remaining the leader in technology across the globe.
How can I buy NASDAQ 100 stock?
The simple answer is that you can’t directly buy NASDAQ 100 stocks. It is an index, a collection of stocks, rather than something you can directly purchase. However, many funds have been created to mimic the performance of this index. The oldest and most popular is the Invesco QQQ ETF. There are other options that you can explore here on the NASDAQ website.
So in summary, the NASDAQ exchange revolutionized investing when it was founded in 1971 as the world's first electronic stock exchange. The NASDAQ 100 was introduced a decade later to represent the largest 100 companies listed on the exchange. It uses a modified market capitalization weighting method to determine the index value. Finally, it’s so important to investors that have an interest in the tech sector because it is heavily weighted in technology company stocks!