If you’re watching financial news or setting up your 401(k), you’ve likely heard of Nasdaq. Nasdaq is the second-largest stock exchange in the world, second to the New York Stock Exchange (NYSE), and home to tech giants like Apple, Google, and Amazon..
Since its introduction in 1971, the Nasdaq exchange has grown to include more than 4,000 company listings including many of today’s biggest corporations. As the value of these companies rises and falls with the economy, so does the value of any portfolio with listings on the Nasdaq exchange.
“Nasdaq has always been an electronic exchange and looked to the future of capital,” says Carol Schleif, deputy chief investment officer of BMO Family Office, a wealth management firm. “Nasdaq has a reputation for being innovative, which is why so many tech stocks list there.”
But exactly what is the Nasdaq and how does it work? Let’s take a look at one of the most widely recognized stock exchanges.
What Is Nasdaq?
The term Nasdaq is the original acronym for the National Association of Securities Dealers Automated Quotation. The name goes back to its beginnings, when it was started by the National Association of Securities Dealers (NASD), a predecessor to the Financial Industry Regulatory Authority (FINRA).
In 2006, the Nasdaq separated from the NASD and became a separate entity. The following year, in 2007, Nasdaq announced that it would combine with the OMX Nordic Exchange to become Nasdaq OMX.
After the New York Stock Exchange (NYSE), Nasdaq made history when it introduced the idea of an electronic stock exchange in 1971. Its reputation lives on as one of the most well-known exchanges in the United States, according to Joseph Hogue, CFA, an investment analyst and founder of the investing education YouTube channel Let’s Talk Money.
“Nasdaq was the first electronic exchange,” Hogue says. “It allowed investors to buy and sell stocks through a computerized system, as opposed to the physical trading floor on the NYSE”
Today, much of the trading on the NYSE also takes place electronically, Hogue points out. The two popular exchanges have a lot of similarities in operation. The NYSE still abides by a hybrid model and, other than during the COVID-19 shutdown, still uses floor traders for some of its transactions. And even though Nasdaq is known for its electronic trading, it has a physical headquarters in New York City, and almost 40 offices around the world.
Nasdaq offers access to different markets, including three different market tiers: The Nasdaq Global Select Market®, The Nasdaq Global Market®, and The Nasdaq Capital Market®
Each of Nasdaq’s market tiers comes with different listing requirements. Companies and closed-ended funds can list themselves for trading on the Nasdaq exchange as long as they meet the listing requirements and pay the applicable fees.
In addition to the exchange, which is where stocks are listed and can be traded, it’s possible to get a feel for the value of the Nasdaq by looking at the Nasdaq Composite. The Nasdaq Composite is an index of all the companies listed on the exchange (roughly 4,000), and it provides a benchmark of measurement for a segment of the stock market.
“The NYSE has slightly higher listing requirements and higher fees, so smaller companies generally prefer to list on the Nasdaq first,” says Hogue.
Schleif also points out that startups and tech companies generally find it easier to get their start on the Nasdaq. Now-famous companies like Apple (AAPL), Alphabet Inc, the parent company of Google (GOOG), and Amazon (AMZN) got their start — and are still listed — on the Nasdaq exchange.
The Nasdaq Trading Platform
The idea behind launching the Nasdaq trading platform was to provide a fair and efficient screen-based securities market. Through the years, Schleif says, Nasdaq has been at the forefront of market innovation, gaining a reputation for moving the capital markets forward.
Trading on the Nasdaq is very similar to trading on the NYSE, according to Hogue.
“When you place an order to buy or sell a stock, it goes through a broker,” Hogue says. “That’s someone with a seat on the physical exchange or a computer connected to the exchange system.”
Regular people don’t get direct access to the Nasdaq — or any stock exchange. When you go online to trade stocks, Hogue points out, you do so through an intermediary. You might use an account with Robinhood, Fidelity, TD Ameritrade, or any other broker that you find online. No matter where you go, though, you need a facilitator to take care of the transaction.
As long as you know the ticker symbol, you can trade a stock whether it’s listed on the Nasdaq or the NYSE.
Once you decide which stock you want to buy or sell, Hogue explains, the broker enters your trade with the exchange, pairing up buy and sell orders at the best price for each. When you do this online, it happens quickly, in a matter of seconds.
“Some stocks are listed on the NYSE while others are listed on the Nasdaq, so investors don’t really have a choice of which exchange is used by the broker,” Hogue says. “Most brokers have access to both, so it’s about which company you’re interested in and not about what exchange you want to use.”
Recent History of Nasdaq
Currently, the Nasdaq Composite is above 14,000. However, prior to the recent runup following the 2008 financial crisis, the Nasdaq first peaked above 5,000 in March 2000. That was the year of the dot-com bust, Schleif points out, and the tech-heavy Nasdaq Composite plummeted shortly thereafter.
“Rebuilding that index has been a long process,” she says. “But since then even some older NYSE companies have left and moved to Nasdaq, just because of that innovative aura that comes from listing on the Nasdaq.”
Other than that, there have been some other events in recent Nasdaq history that have turned heads:
- Nasdaq OMX joined the United Nations Sustainable Stock Exchanges initiative as a founding member in 2012.
- The first woman to run a major exchange in the United States, Adena Friedman, became CEO in 2016. She started out as an intern at Nasdaq.
- Nasdaq proposed new listing rules related to board diversity, requiring companies to include diverse directors, in 2020.
Nasdaq is an exchange where companies can list shares of their stock. Investors access these exchanges through brokers and can buy and sell company shares. Nasdaq is known for its innovation and claims the distinction of being the world’s first electronic stock exchange. Today, many of the world’s top companies are listed on the Nasdaq, and it’s possible for you to buy and sell shares of those companies.