What Is NASDAQ And How Does It Work?

Have you just searched “what is NASDAQ” on the internet? Here is a simple example to begin with: Do you use a smartphone? You might be scrolling through social media, or shopping online. In doing so, you interact with companies listed on the Nasdaq every single day.

Giants like Apple, Amazon, and Google all call NASDAQ, their market home. However, for many new investors, the term "NASDAQ" might remain a bit of a mystery. So, let us learn what is NASDAQ or what is NASDAQ exchange and its global economic influence in detail.

What Is NASDAQ?

NASDAQ stands for the National Association of Securities Dealers Automated Quotations. Launched in 1971, it changed the financial world forever. It is an American stock exchange and one of the largest in the world.

Before 1971, trading used to happen on a physical floor. People used to shout orders at each other. Nasdaq became the world's first electronic stock market. It replaced the noisy, crowded trading floor with a streamlined digital system that works quietly in the background.

People often use the word "Nasdaq" in more than one way, so it helps to know the difference:

1. Nasdaq as an exchange: This refers to the marketplace where investors buy and sell company shares.

2. Nasdaq as an index (like the Nasdaq Composite): In this sense, it represents the performance of the companies listed on the exchange.

So when you hear someone say, “The Nasdaq is up today,” they are almost always talking about the index. But when a company announces, “We are listing on Nasdaq,” that refers to the exchange itself.

How Does The NASDAQ Work?

NASDAQ operates differently from the NYSE (New York Stock Exchange). The NYSE is one of the oldest and biggest exchanges in the world and has long used a physical trading floor on Wall Street. Nasdaq, on the other hand, has operated electronically right from the start.

Instead of a physical auction, the Nasdaq uses a system of "market makers.” A market maker is a large financial firm that holds an inventory of a specific stock and stands ready to buy or sell that stock at publicly quoted prices.

Let us understand the role of the market makers:

• Buying: When you want to buy shares, the market maker sells them to you from their inventory.

• Selling: When you want to sell, the market maker buys them from you. This system is designed to ensure liquidity. Meaning, you can almost always find a buyer or seller for your shares instantly.

NASDAQ can handle billions of trades every day, efficiently, thanks to this electronic dealer network.

What Is NASDAQ Exchange?

When people search “what is the NASDAQ exchange,” they are usually trying to understand how it differs from other markets. The NASDAQ is the second-largest stock exchange in the world by market capitalisation, just after the NYSE.

It began as a fully electronic marketplace, and that early focus on technology naturally drew innovative and fast-growing companies. Today, the NASDAQ lists more than 3,000 companies from a wide range of sectors. Still, it is best known as the hub of the global technology industry.

So if a company is involved in software, biotechnology, artificial intelligence, or anything tech-driven, there is a good chance you will find it listed on the NASDAQ.

The Different NASDAQ Indices

To understand “what is NASDAQ” better, you need to know about its indices. An index acts like a thermometer for the market. It gives you a single number to judge if the market is healthy or sick. Here are two key NASDAQ indices you should know:

• The NASDAQ Composite - The NASDAQ composite is the broad index. It includes almost every single stock listed on the NASDAQ exchange.

So, when you hear a news anchor discussing the general health of the tech sector or the broader market, they usually quote the NASDAQ Composite. The index provides a wide view on the performance of thousands of companies.

• The NASDAQ 100 - The NASDAQ 100 index is more exclusive. It tracks the 100 largest non-financial companies listed on the NASDAQ.

This list includes the heavy weight "blue-chip" tech companies that drive the modern economy. Investors use it to focus purely on growth and innovation because it usually excludes financial companies (like banks).

Why Do Tech Companies Prefer NASDAQ?

Many fast growing firms choose NASDAQ for a few clear reasons. Here as follows:

• Cost - Generally, listing on the NASDAQ is more affordable than listing on the NYSE. This appeals to younger, growing companies that want to save capital.

• Image - Tech companies want to associate themselves with innovation, and NASDAQ's history as the first electronic market aligns perfectly with that image.

How to Invest In The NASDAQ?

You cannot buy "the NASDAQ" directly because you cannot buy an index. However, you have two simple ways to invest in the companies listed in a NASDAQ index.

• ETFs (Exchange Traded Funds) - An ETF, as the name suggests, is a fund made up of a basket of stocks that trades just like a single share. So, you can buy an ETF that tracks the NASDAQ 100. Thus, you can effectively own a tiny slice of the top 100 companies on the exchange by purchasing one share of this ETF. This can offer instant diversification.

• Individual Stocks - You can also buy shares of specific companies listed on the NASDAQ. If you believe that a company has a bright future, you can directly buy its stock using your broking account.

Summary

• Definition - NASDAQ is both an electronic stock exchange and an index tracking the stocks on that exchange.

• Mechanism - NASDAQ operates through a network of dealers (market makers) instead of a physical trading floor.

• Indices - The NASDAQ Composite tracks all listed stocks. Similarly, the NASDAQ 100 tracks the top 100 non-financial firms.

• Focus - NASDAQ is the preferred home for technology and growth-orientated companies.

Understanding “what is NASDAQ” can empower you to follow financial news with confidence. So, whether you invest in an index fund or individual tech stocks, the NASDAQ market can play a pivotal role in your investments.