First and foremost, the Nasdaq is the second largest stock and securities exchange in the world – only the New York Stock Exchange (NYSE) is bigger. It attracts more blue-chip tech companies and growth-oriented businesses than any other exchange, perhaps on the basis of the fact that the Nasdaq doesn’t have a physical trading floor, with all the trades instead taking place electronically.
How the Nasdaq index works
From the beginning – when it was launched as the world’s first entirely electronic stock market in 1971 – the NASDAQ was designed so that the stocks listed on it could be traded through an automated network of computers. Some of the largest blue-chip companies in the world are traded on the Nasdaq, including many in the internet, computer and hi-tech software sectors. It is not exclusively tech-oriented, however, and the companies listed on the Nasdaq index include the following:
Because many of the companies attracted to the Nasdaq are extremely growth-oriented, the stocks that are listed have a tendency to be more volatile than those on more traditional exchanges.
As an exchange, the Nasdaq deals with listed stocks and over the counter (OTC) stocks. The provision of automated quotations, which has been a feature of the Nasdaq since its launch, meant that OTC trading was such a feature of the index that it was described as an “OTC market” across the media and in some trade publications. All of the trades made by investors on the Nasdaq take place via dealers rather than directly via auctions, and as well as being the first exchange to provide electronic trading, the Nasdaq embraced innovation by becoming the first exchange in the world to:
Launch a dedicated website
Store records in the cloud
Sell the technology it had developed to other exchanges
What trading hours does the Nasdaq operate under?
The Nasdaq has the same trading hours as the NYSE – 9.30am to 4pm Eastern Standard Time (EST). In addition to this, however, it does operate pre and post-market hours, being accessible from 4am to 9.30am EST and then from 4pm to 8pm EST.
What does a business need to be listed on the Nasdaq?
In order for a stock or utility to be listed on the Nasdaq the company must meet the following requirements:
It must be registered with the Securities Exchange Commission (SEC)
It must have at least three market makers (the name given to dealers able to carry out trades over Nasdaq’s electronic exchanges)
It must meet specific criteria related to the size of the company and its trading volume
It also has to meet other requirements in terms of corporate governance, finances and liquidity
A company making an application to be listed on the Nasdaq may have to wait four to six weeks for that application to be approved.
Tiers within the Nasdaq
There are three market tiers within the Nasdaq, and where a company stock is listed will depend upon factors such as the market capitalization of the company.
The Global Select Market is the highest tier and comprises US and international companies that are seen as meeting the highest standards set by Nasdaq.
The Global Market is the mid-tier for companies with medium scale capitalizations.
The Capital Market used to be called the SmallCap market and, as that suggests, it is made up of the companies on Nasdaq with the smallest capitalizations.
Major differences between the Nasdaq and the NYSE
The Nasdaq is fully electronic, while the NYSE combines electronic trades with a physical trade floor
The Nasdaq has a narrower market range than the NYSE, focusing on tech companies
The Nasdaq is a dealers’ market while the NYSE is an auction market offering direct trades
The Nasdaq is more growth-oriented and volatile than the NYSE
How has Nasdaq performed in recent years?
In July 2020, the Nasdaq index of the top 100 stocks reported a return over the last five years of 118%, and over the last 10 years of 426%.
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