Understanding the NASDAQ
Written by Bennet Grill for Gaebler Ventures
Like the S&P 500 and the Dow Jones Industrial Average, the NASDAQ is often mentioned as an indicator of the health of the American economy. This article explains how the NASDAQ came into its current form and the role it plays in equity markets.
While the S&P 500 and the Dow are indices of certain equity securities, the NASDAQ is a stock exchange where companies list their shares to be traded on the market.
NASDAQ was formerly an acronym standing for "National Association of Securities Dealers Automated Quotations," but its name now stands alone. With over 3,600 companies listed, the NASDAQ Composite includes more companies than any other stock exchange in the world. The total capitalization of companies listed on the NASDAQ is over $4.5 trillion dollars.
NASDAQ began in 1971 as an electronic trading platform. Initially, the NASDAQ was only an electronic bulletin board that posted prices of securities that were too small to be listed on larger exchanges, such as the NYSE. Since no exchanges were actually taking place through the NASDAQ, trades were initially executed over-the-counter (OTC,) which simply means that the transaction takes places between two parties instead of through the intermediary of an Exchange.
Throughout the 1980s, the NASDAQ started to adopt a number of exchange-like qualities and began to facilitate transactions in addition to quoting securities prices. The NASDAQ was the first exchange to offer an electronic ordering system; in 1987 the small order execution system (SOES) was introduced as a means for individual investors to place orders directly through the exchange.
Since its founding in 1971, the NASDAQ has acquired a number of exchanges. In 1998, the NASDAQ acquired the American Stock Exchange (AMEX,) which created the NASDAQ-AMEX market group. Since the NASDAQ was purely an electronic exchange and the American Stock Exchange had a physical trading floor, the two exchanges operated separately. The two exchanges operated separately and in 2000 the NASDAQ was spun off as a public company. 2007 marked a busy year for NASDAQ acquisitions. In May, NASDAQ acquired OMX, which controlled seven Scandinavian area stock exchanges; this created the NASDAQ OMX Group. In October and November, NASDAQ acquired the Boston Stock Exchange and the Philadelphia Stock Exchange, respectively.
While the NASDAQ OMX group is the corporation which own a number of stock exchanges, the "NASDAQ" you hear quoted on CNBC and other financial news outlets most often refers to the NASDAQ Composite, which is a listing of over 3,600 companies. Many technology and growth companies, such as Amazon, Apple, Dell, eBay, and Microsoft, have chosen to list with NASDAQ instead of the NYSE. While the majority of NASDAQ listed companies are American in origin, it also includes some international companies.
The NASDAQ Composite is a leading stock index for technology and growth companies. Its parent company, the NASDAQ OMX Group is in control of a number of influential exchanges across the world. It's important for entrepreneurs and small business owners to understand the significance of the NASDAQ and the role it plays in financial markets.
Bennet Grill is a writer who has a passion for business and finance. He is currently an Economics major at Duke University in North Carolina.
Share this article
Additional Resources for Entrepreneurs