Nasdaq Composite Index Explained

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Nasdaq Composite Index

What Is the Nasdaq Composite Index?

The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities.

Key Takeaways

  • The Nasdaq Composite Index is a large market-cap-weighted index of more than 2,500 stocks, American depositary receipts (ADRs), and real estate investment trusts (REITs), among others.
  • The index is calculated constantly throughout the trading day with the final value reported at 4:16 p.m. daily once prices have fully settled after the 4:00 p.m. ET market close.
  • The Index’s composition is nearly 50% technology, with consumer services, health care and financials the next most prominent industries.

Understanding Nasdaq Composite Index

The Nasdaq Composite is not limited to companies that have U.S. headquarters—something that sets it apart from a number of other indexes. It is very common to hear the closing price of the Nasdaq Composite Index reported in the financial press or as part of the evening news because it is such a broad-based market index.

Nasdaq Methodology

The Nasdaq Composite Index uses a market capitalization weighting methodology. The index’s value equals the total value of the share weights of each of the constituent securities, multiplied by each security’s last price. This total is then adjusted by dividing by an index divisor, which scales the value to a more appropriate figure for reporting purposes. The index is calculated continuously throughout the trading day, but it is reported once per second, with the final confirmed value being reported at 4:16 p.m. each trading day.

Two versions of the Nasdaq Composite Index are calculated: a price return index and a total return index. The total return index includes the reinvestment of cash dividends on their respective dividend ex-dates. Both versions of the index include non-dividend cash distributions. On the market close of Sept. 24, 2003, both versions of the index were synchronized.

Changes in price due to corporate actions such as stock splits, stock dividends or spinoffs are made on the action’s ex-date. Changes in total shares outstanding due to items such as conversions, stock repurchases, secondary offerings or acquisitions are usually made on the night before the action’s effective date.

Eligibility requirements for the index are reviewed throughout the year. A security that does not meet the eligibility requirements can be removed at any time, usually at its last sale price.

The Nasdaq Composite Index is one of the most widely-watched indexes in the world and is often seen as a stand-in for the technology sector, due to its heavy weighting in technology.

Nasdaq Composite Eligibility Criteria

To be eligible for inclusion in the Nasdaq Composite Index, the security’s U.S. listing must be exclusively on the Nasdaq Stock Market (unless the security was dually listed on another U.S. market prior to January 1, 2004, and has continuously maintained such listing). The type of security must be one of the following:

  • American Depositary Receipts (ADRs)
  • Common Stock
  • Limited Partnership Interests
  • Ordinary Shares
  • Real Estate Investment Trusts (REITs)
  • Shares of Beneficial Interest (SBIs)
  • Tracking Stocks

Security types ineligible for inclusion are closed-end funds, convertible debentures, exchange-traded funds, preferred stocks, rights, warrants, units, and other derivative securities. A security is removed from the Composite Index if eligibility criteria are no longer met.

Nasdaq Composite Composition

As of March 15, 2020, the industry weights of the Nasdaq Composite Index’s individual securities are as follows: technology at 48.39%, consumer services at 19.43%, health care at 10.21%, financials at 7.21%, industrials at 6.85%, consumer goods at 5.51%, utilities at 0.81%, telecommunications at 0.72%, oil and gas at 0.55% and basis materials at 0.32%.

Nasdaq Composite Index

Introduced in 1971, the Nasdaq Composite is a broad based index comprising over 3000 companies listed in the Nasdaq Stock Exchange. The index value is computed using the market capitalization weighted methodology.

The Nasdaq Composite Index is widely followed as the leading indicator of the overall performance of technology companies and growth companies. As both U.S and non-U.S. companies are listed on the Nasdaq Stock Market, the Nasdaq Composite is not an exclusively U.S. index.

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To be eligible for inclusion in the Nasdaq Composite Index, a security’s U.S. listing must be exclusively on the NASDAQ Stock Market (with the exception that if the stock was dually listed on another U.S. market prior to 2004 and has continuously maintained such listing), and have a security type of either:

  • American Depositary Receipts (ADRs)
  • Common Stock
  • Limited Partnership Interests
  • Ordinary Shares
  • Real Estate Investment Trusts (REITs)
  • Shares of Beneficial Interest (SBIs)
  • Tracking Stocks

Not included in the Nasdaq Composite Index are closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities.

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NASDAQ Composite explained

The NASDAQ Composite (ticker symbol ^IXIC) [1] is a stock market index of the common stocks and similar securities (e.g. ADRs, tracking stocks, limited partnership interests) listed on the Nasdaq stock market. Along with the Dow Jones Industrial Average and S&P 500 it is one of the three most-followed indices in US stock markets. The composition of the NASDAQ Composite is heavily weighted towards information technology companies. The NASDAQ-100, whose components are a subset of the NASDAQ Composite’s, accounts for over 90% of the NASDAQ Composite’s movement, and there are many ETFs tracking its performance.

Annual returns

Year Starting Amount Highest Amount Lowest Amount Finishing Amount Return Change Return Rate
1971 100.00 114.12 99.68 114.12 +14.12 +14.12%
1972 114.12 135.15 113.65 133.73 +19.61 +17.18%
1973 133.73 136.84 88.67 92.19 -41.54 -31.06%
1974 92.19 96.53 54.87 59.82 -32.37 -35.11%
1975 59.82 88.00 59.82 77.62 +17.80 +29.76%
1976 77.62 97.88 77.06 97.88 +20.26 +26.10%
1977 97.88 105.05 93.66 105.05 +7.17 +7.33%
1978 105.05 139.25 99.09 117.98 +12.93 +12.31%
1979 117.98 151.14 117.84 151.84 +33.86 +28.70%
1980 151.84 206.19 124.09 202.34 +50.50 +33.26%
1981 202.34 223.47 175.03 195.84 -6.50 -3.21%
1982 195.84 240.70 159.14 232.41 +36.57 +18.67%
1983 232.41 286.07 230.59 278.60 +46.19 +19.87%
1984 278.60 287.90 225.30 247.10 -31.50 -11.31%
1985 247.10 325.60 245.80 324.90 +77.80 +31.49%
1986 324.90 384.00 322.10 348.80 +23.90 +7.36%
1987 348.80 456.30 288.50 330.50 -18.30 -5.25%
1988 330.50 397.50 329.00 381.40 +50.90 +15.40%
1989 381.40 487.50 376.90 454.80 +73.40 +19.24%
1990 454.80 470.30 323.00 373.80 -81.00 -17.81%
1991 373.80 586.35 353.00 586.34 +212.54 +56.86%
1992 586.34 676.95 545.95 676.95 +90.91 +15.45%
1993 676.95 791.20 644.71 776.80 +99.85 +14.75%
1994 776.80 800.63 690.95 751.96 -24.84 -3.20%
1995 751.96 1,074.85 751.96 1,052.13 +300.17 +39.92%
1996 1,052.13 1,328.95 977.79 1,291.03 +238.90 +22.71%
1997 1,291.03 1,748.78 1,194.16 1,570.35 +279.32 +21.64%
1998 1,570.35 2,202.63 1,465.61 2,192.69 +622.34 +39.63%
1999 2,192.69 4,090.61 2,192.69 4,069.31 +1,876.62 +85.59%
2000 4,069.31 5,132.52 2,288.16 2,470.52 -1,598.79 -39.29%
2001 2,470.52 2,892.36 1,387.06 1,950.40 -520.12 -21.05%
2002 1,950.40 2,098.88 1,108.49 1,335.51 -614.89 -31.53%
2003 1,335.51 2,015.23 1,253.22 2,003.37 +667.86 +50.01%
2004 2,003.37 2,185.56 1,750.82 2,175.44 +172.07 +8.59%
2005 2,175.44 2,278.16 1,889.83 2,205.32 +29.88 +1.37%
2006 2,205.32 2,470.95 2,012.68 2,415.29 +209.97 +9.52%
2007 2,415.29 2,861.51 2,331.57 2,652.28 +236.99 +9.81%
2008 2,652.28 2,661.50 1,295.48 1,577.03 -1,075.25 -40.54%
2009 1,577.03 2,295.80 1,265.62 2,269.15 +692.12 +43.89%
2020 2,269.15 2,675.26 2,100.17 2,652.87 +383.72 +16.91%
2020 2,652.87 2,878.94 2,298.89 2,605.15 -47.72 -1.80%
2020 2,605.15 3,196.93 2,605.15 3,019.51 +414.36 +15.91%
2020 3,019.51 4,177.73 3,019.51 4,176.59 +1,157.08 +38.32%
2020 4,176.59 4,814.95 4,103.88 4,736.05 +559.46 +13.40%
2020 4,736.05 5,231.94 4,292.14 5,007.41 +271.36 +5.73%
2020 5,007.41 5,487.41 4,209.76 5,383.12 +375.71 +7.50%
2020 5,383.12 7,003.89 5,383.12 6,903.39 +1,520.27 +28.24%
2020 6,903.39 8,109.69 6,192.92 6,635.28 -268.11 -3.88%
2020 6,635.28 9,022.39 6,463.50 8,972.60 +2337.32 35.23%

History

The index was launched in 1971, with a starting value of 100. Over the years, the index has soared tremendously despite multiple periods of decline.

Dot-com boom and bust

On July 17, 1995, the index closed above the 1,000 mark for the first time. It made steady gains in the following years to reach 2,000 points by 1998, then began to accelerate significantly. This process mushroomed in late 1999. The index closed that year at 4,069.31 points. On March 10, 2000, the index finally peaked at an intra-day high of 5,132.52, [2] and closed at an all-time high of 5,048.62.

On March 10, 2000, the NASDAQ Composite peaked at 5,132.52, but fell to 3,227 by April 17, [3] and in the following 30 months fell 78% from its peak. [4]

The decline from this peak signalled the beginning of the dot-com bubble burst. There were multiple things contributing to this Dot-com boom and bust. Some optimists thought the internet and World Wide Web would be more significant to business than any kind of Industrial Revolution in the past, possibly enabling us to achieve a Technological Singularity. More pessimistic types were concerned that business would require massive technology replacement to achieve Y2K compatibility.

The index declined to half its value within a year, and finally hit the bottom of the bear market trend on October 10, 2002, with an intra-day low of 1,108.49. While the index gradually recovered since then, it did not trade for more than half of its peak value until May 2007. The 2000s (decade) brought a mix of pessimistic news stemming from the Early 2000s recession, the September 11 attacks and the impending Afghan War along with the 2003 invasion of Iraq.

Financial crisis

The index opened the fourth quarter of 2007 with new 80-month highs, closing above the 2,800 point mark on October 9, 2007, and reaching an intra-day level of 2,861.51 on October 31, 2007, the highest point reached on the index since January 24, 2001.

High energy prices and the possibility of recession dropped the NASDAQ into a bear market in early 2008, which was recognized on February 6 when the NASDAQ closed below the 2,300 level, about 20% below the recent highs. Furthermore, the failure of Lehman Brothers in September brought world financial markets into turmoil. The NASDAQ was no exception, experiencing record levels of market volatility. On September 29, 2008, the NASDAQ dropped nearly 200 points, the most since the tech bubble burst, losing 9.14% (third largest in history) to fall beneath the 2,000 level. Conversely, on October 13, 2008, the NASDAQ recorded a gain of nearly 200 points (more than 11%). On March 9, 2009, the composite hit a six-year intra-day low of 1,265.52 before recovering under the influence of Federal Reserve quantitative easing (QE).

2020s bull market

Amid hope that the Great Recession, the United States housing bubble and the Global financial crisis of 2008–2009 were easing and possibly coming to an end, the NASDAQ established a volatile base from which the index would finally surpass the 3,000 mark, and the initial crash low of mid-2000 (3,042.66), for the first time since the end of the 20th century. This first occurred intra-day on February 29, 2020, before further volatile pullbacks. Later in 2020, the index managed a yearly close above 3,000 for only the second time in its history, with a total of 3,019.51 points.

With the extension of relatively low tax rates for most incomes, the index jumped to begin 2020 with only minor pullbacks. On November 26, 2020, the index made its first close above 4,000 since September 7, 2000. Although it still stood almost 20% below its all-time highs, the index did set a new record annual close of 4,176.59 on December 31, 2020. On March 2, 2020, the NASDAQ closed above 5,000 for the first time since March 9, 2000.

On April 23, 2020, the NASDAQ finally broke through the record of 15 years earlier and set a new high for a daily close, though it was still just short of the all-time intraday high set in 2000. [5] After its first significant correction (greater than 10%) in about four years, the index roared back above 5,000 with a triple-digit gain on October 23, 2020. Two years later, the Nasdaq crossed 7,000 intraday, which was within reach of the inflation-adjusted high set back on March 10, 2000. Although Nasdaq flirted with the “unthinkable milestone” on January 16, 2020, the COMP closed above it the next day for the first time since the end of the Dot-com boom. [6] [7] Later that same year, NASDAQ plunged more than 20% below its high from August 29th, thus confirming bear market status on a closing-basis. The following year, NASDAQ rallied more than 20% from its trough on December 24, 2020, though it remains below last year’s high, resulting in debates as to whether the index has left bear market territory or remains in there. [8]

Criteria

To be eligible for inclusion in the Composite, a security’s U.S. listing must be exclusively on the NASDAQ Stock Market (unless the security was dually listed on another U.S. market prior to 2004 and has continuously maintained such listing), and must be one of the following security types:

  • American Depositary Receipts (ADRs)
  • Common Stock
  • Limited Partnership Interests
  • Ordinary Shares
  • Real Estate Investment Trusts (REITs)
  • Shares of Beneficial Interest (SBIs)
  • Tracking Stocks

Closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities are not included. If at any time a component security no longer meets the above criteria, the security becomes ineligible for inclusion in the Composite Index and is removed.

Investing

Investing in the NASDAQ Composite Index is currently made accessible through an exchange-traded fund issued by fund manager Fidelity Investments. Introduced on October 1, 2003, the ETF (NASDAQ:) attempts to match the overall performance of the index. It is not nearly as popular as the “Q’s” (NASDAQ:) which tracks the NASDAQ-100.

See also

Notes and References

  1. Web site: NASDAQ Composite. Yahoo! Finance. 9 February 2020.
  2. http://business-finance.top10-digest.com/stocks-rally-to-pre-crisis-heights/ Stocks Rally to Pre-Crisis Heights | Business and Finance Digest
  3. Web site: NASDAQ Composite daily index.
  4. News: 3 Lessons for Investors From the Tech Bubble . James K. . Glassman . . February 11, 2020.
  5. Web site: Mahmudova. Anora. Sjolin. Sara. 23 April 2020. MarketWatch. Nasdaq posts first record close in 15 years. 27 April 2020.
  6. News: Inconceivable! The Nasdaq Crossed 7000…and a Once Unthinkable Milestone Is Now in Reach. Eule. Alex. 2020-12-19. en-US.
  7. Web site: Nasdaq Tops Inflation-Adjusted High from Dot-Com Boom. Eisen. Ben. 2020-01-17. WSJ. en-US. 2020-01-17.
  8. Web site: The Nasdaq is on the brink of escaping from bear-market territory. DeCambre. Mark. MarketWatch. en-US. 2020-03-20.

This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article “NASDAQ Composite”.

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