The NASDAQ-100 – What Is It & How Exactly Does It Work?

While the overall market value is derived from the composite, the NASDAQ-100 is a selection of the top valued companies within the NASDAQ, ranked by market capitalization…and is heavily weighted towards the tech sector… leads many investors to look at the index as a proxy for the more volatile, speculative shares. #munKNEE/Money!

Founded in 1971 by the National Association of Security Dealers (NASD), NASDAQ began its life as an acronym for the National Association of Securities Dealers Automated Quotations. At the time of its creation, it was the first and only electronic market, though at the time it only provided quotations and did not facilitate trading. Gradually the market expanded to include trade and volume reporting as well as automatic trading.

In addition to being the first electronic market, NASDAQ would eventually become the first market to trade online, which in turn attracted more and more large companies. This technological prowess is also partly credited with modernizing the IPO.

Today, the NASDAQ is the second-largest stock market in the world, trailing only the New York Stock Exchange in market capitalization. The market is also not limited to companies that have their headquarters in the United States, a distinction which sets it apart from several other U.S. markets. It currently has a market cap in excess of $10 trillion.

How Does it Work?

…Nasdaq uses a market capitalization weighting method, i.e., the market’s components are weighted according to the total market value of their shares [and] since individual stock prices change daily, this, in turn, changes the stock index’s value throughout the day. The index value is reported once per second with the day’s final value checking in at 4:16 pm each trading day…

Which Companies Are in the NASDAQ-100?

• Technology: 46.40% of the market,
• Consumer services: 20.16%,
• Health care: 10.86%,
• Financials: 8.59%,
• Industrials: 6.32%,
• Consumer goods: 5.49%,
• Oil and gas: 0.71%,
• Telecommunications: 0.70%,
• Basic materials: 0.47%, and
• Utilities: 0.30%.

[Click on the following hyperlink for] the full list of companies and their components’ weight …

Because a large part of the index is technology and therefore export-driven, with factories and warehouses overseas, the index is not typically relied upon to give a wholly accurate look at the US economy. Rather, the NASDAQ can be used to see a larger picture in which investors can gauge risk appetite. The market tends to come up short in times of economic uncertainty, playing the role of a reverse safe-haven for investors… 

The above excerpts from the original article by Gil Ben Hur have been edited ([ ]) and abridged (…) for the sake of clarity and brevity.