The National Association of Securities Dealers Automated Quotations (NASDAQ) is one of the largest and most influential stock exchanges in the world. The NASDAQ is more than just a marketplace for buying and selling stocks. As a driver of innovation and a reflection of broader economic trends, particularly in the technology sector, it plays a pivotal role in shaping global financial markets.
Whether you’re a seasoned investor or just starting to explore the stock market, understanding the NASDAQ is essential due to its prominence and specialization in high-growth industries like technology, biotechnology, and healthcare. Keep reading to learn more about the NASDAQ's history, structure, and significance and how it differs from other leading financial exchanges.
What is the NASDAQ?
Unlike traditional exchanges like the New York Stock Exchange (NYSE), the NASDAQ doesn’t have a physical trading floor. Instead, all transactions take place electronically through a network of computers, making it a highly efficient and fast-moving exchange.
The NASDAQ is globally accessible, meaning investors from around the world can participate in its markets. Its listing process is particularly attractive to technology companies, from startups to global giants, because it has more flexible listing requirements than some other exchanges. As a result, companies in high-growth sectors often choose the NASDAQ as their primary exchange when going public.
The NASDAQ is divided into three tiers:
- NASDAQ Global Select Market: The top-tier market with the most stringent requirements, aimed at large, well-established companies.
- NASDAQ Global Market: A middle-tier option for mid-sized companies that still demonstrate strong financial health.
- NASDAQ Capital Market: The most flexible tier for smaller companies and startups, offering easier entry for early-stage businesses.
History of the NASDAQ
The NASDAQ Stock Market was founded in 1971 by the National Association of Securities Dealers (NASD) as the world's first electronic stock exchange. Initially designed to improve the transparency of over-the-counter (OTC) trading, NASDAQ revolutionized the stock market by allowing trades to be conducted electronically rather than through physical trading floors where brokers would execute trades by shouting bids and offers.
Initially, the NASDAQ was seen as a market for smaller companies. However, as technology companies began to emerge as dominant players in the global economy, the NASDAQ became the preferred exchange for high-growth industries. The exchange gained global attention as it became the home for some of the most significant tech initial public offerings (IPOs) in history, including Microsoft NASDAQ: MSFT, Apple NASDAQ: AAPL, Amazon NASDAQ: AMZN, and Google (now Alphabet NASDAQ: GOOG).
The dot-com boom of the late 1990s further solidified the NASDAQ's reputation as the go-to exchange for tech companies. While the burst of the dot-com bubble in 2000 led to significant market losses, the NASDAQ quickly rebounded and continued to grow.
In 2007, NASDAQ merged with the OMX Group, a leading operator of stock exchanges in the Nordic and Baltic regions, creating NASDAQ OMX Group (now Nasdaq, Inc.NASDAQ: NDAQ). This expanded NASDAQ's reach globally and enhanced its technological capabilities. Nasdaq, Inc. owns and operates the NASDAQ Stock Market and other exchanges in Europe, primarily in the Nordic and Baltic regions.
How Does the NASDAQ Operate?
The NASDAQ operates differently from traditional exchanges like the NYSE. It is a dealer's market, meaning that transactions are facilitated by market makers rather than through an auction process. In an auction market, such as the NYSE, prices are determined through bids and offers, with most trades now executed electronically, though a physical trading floor still exists for certain functions. On the NASDAQ, market makers quote prices at which they are willing to buy and sell stocks, and all trades are executed electronically.
The absence of a physical trading floor allows the NASDAQ to operate with greater speed and efficiency. Trades can be executed almost instantaneously, making it particularly attractive to investors looking to trade frequently or take advantage of short-term market movements. The exchange’s electronic system also provides a high level of transparency, as all trades and quotes are visible to market participants.
What Are the NASDAQ Listing Requirements?
Listing on the NASDAQ requires companies to meet certain financial and regulatory standards. However, compared to some other exchanges, such as the NYSE, the NASDAQ's listing requirements are often seen as more flexible, which has made it an attractive option for emerging tech companies and startups looking to go public.
To be listed, a company needs to meet specific requirements related to its financial health, market capitalization, and corporate governance:
- A minimum share price of $4 at the time of listing
- At least three market makers (firms that facilitate the buying and selling of their stock)
- Independent directors, an audit committee, and proper financial reporting mechanisms (to maintain investor trust and regulatory compliance)
Once a company has passed the above threshold, NASDAQ offers three primary tiers catering to companies of different sizes and levels of financial strength. These tiers allow businesses ranging from well-established corporations to emerging startups to access capital and grow.
NASDAQ Global Select Market
The NASDAQ Global Select Market is the most prestigious and stringent tier. It is typically reserved for large, financially stable companies with strong governance practices. To qualify for this market, a company must meet one of several financial standards, such as earning at least $11 million in pre-tax income over the last three years or having a minimum market capitalization of $850 million, combined with at least $90 million in annual revenue. Additionally, companies must have a minimum of 1.25 million publicly traded shares.
NASDAQ Global Market
The NASDAQ Global Market serves as a middle tier, accommodating mid-sized companies that may not meet the more rigorous requirements of the Global Select Market but are still financially solid. This tier offers multiple paths to listing through different financial standards. A company might qualify by demonstrating at least $1 million in pre-tax income in the most recent fiscal year or two of the last three years. Alternatively, a market capitalization of $75 million, combined with $75 million in revenue, is another viable path to listing. The liquidity requirements are slightly lower than those for the Global Select Market, with companies needing to have at least 1.1 million publicly traded shares and 400 shareholders, each holding at least 100 shares.
NASDAQ Capital Market
The NASDAQ Capital Market is the most accessible of the three tiers and is designed for smaller companies, including startups and growth-oriented businesses that may not yet have reached the scale of larger firms. To qualify, a company can have as little as $5 million in stockholders’ equity or a market capitalization of $50 million. Alternatively, companies can meet the listing requirements by having a net income of $750,000 in the most recent fiscal year or two of the last three years. Liquidity requirements are also more lenient, with companies needing a minimum of 1 million publicly traded shares and 300 round lot shareholders.
NASDAQ Composite and NASDAQ-100
The NASDAQ also serves as the foundation for a number of influential stock indexes that track the performance of companies listed on the NASDAQ exchange. These indexes are important tools for investors, as they provide a snapshot of the overall market and can be used to gauge the health of the economy. They also serve as benchmarks for a wide range of financial products, including exchange-traded funds (ETFs) and mutual funds, which allow investors to gain exposure to the performance of NASDAQ-listed companies without having to buy individual stocks.
Two of the most well-known NASDAQ indexes are the NASDAQ Composite and the NASDAQ-100, each serving a unique role in assessing market performance.
The NASDAQ Composite is a broad market index that tracks the performance of more than 3,000 companies listed on the NASDAQ exchange, offering a comprehensive view of the overall market with a particular emphasis on the technology sector. It is heavily used to gauge the performance of tech-driven industries and high-growth companies.
The NASDAQ-100, on the other hand, is a more focused index that tracks the 100 largest non-financial companies on the NASDAQ. It highlights major players in the technology, healthcare, and consumer sectors and serves as a key benchmark for investors interested in leading innovators and growth-oriented firms.
NASDAQ vs. NYSE
The NASDAQ and the NYSE are the two largest stock exchanges in the world. While the NYSE is the largest by market capitalization, the NASDAQ often leads in terms of the number of transactions and trade execution speed. Let's take a look at the key differences between the two exchanges:
- Trading Mechanism: NASDAQ operates entirely electronically, while the NYSE uses a hybrid model with both electronic and physical trading floors.
- Trade Facilitation: NASDAQ relies on market makers to facilitate trades, whereas the NYSE uses an auction process to match buyers and sellers.
- Types of Companies: NASDAQ is known for its tech-heavy listings and growth-oriented companies, while the NYSE is home to blue-chip, well-established firms, including industrials and financial institutions.
- Company Maturity: Companies on the NYSE tend to be larger and more mature, while the NASDAQ attracts younger, more innovative firms, especially in sectors like tech, biotech, and healthcare.
Importance of the NASDAQ in Global Markets
As the exchange of choice for many of the world’s leading tech companies, the NASDAQ has helped shape the modern economy by providing these firms with access to capital, enabling them to grow. The NASDAQ is also a key indicator of investor sentiment, particularly in the technology sector. When NASDAQ stocks perform well, it often reflects optimism about the future of technology and innovation. Conversely, when the NASDAQ declines, it can signal concerns about economic growth or risk in high-growth sectors.
For emerging companies, the NASDAQ offers a platform to raise capital through IPOs. Many startups, particularly in tech, biotech, and healthcare, see the NASDAQ as the best place to go public because of its global reach and reputation for fostering innovation.
Future Trends and Projections
Looking ahead, the NASDAQ is poised to remain at the forefront of global financial markets, particularly as emerging technologies such as artificial intelligence (AI), blockchain, and fintech continue to grow. The exchange is likely to see an influx of new companies from these innovation sectors, further cementing its reputation as the leading platform for high-growth industries.
However, the NASDAQ may also face challenges, particularly around regulation and market volatility. As technology continues to reshape industries and markets, regulators may need to update rules to address new risks, such as cybersecurity threats or the impact of algorithmic trading. Additionally, the NASDAQ’s heavy concentration in the tech sector means that it can be more volatile than other exchanges, which could be a risk for investors during periods of economic uncertainty.
Shaping the Future of Global Finance and Technology
The NASDAQ Stock Market is a cornerstone of the global financial system, particularly for investors and companies in the technology sector. With its innovative electronic trading system, tech-heavy listings, and global accessibility, the NASDAQ has transformed how the stock market operates and continues to shape the future of finance. For investors, understanding the NASDAQ and its key indices can offer valuable insights into market trends and opportunities, especially in high-growth sectors.
Invest Smarter with MarketBeat
Navigating the world of technology and growth stocks can be complex. MarketBeat has the tools to update you on the latest market news and strategy.Click here to view our latest offerings.
Before you consider Nasdaq, you'll want to hear this.
MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Nasdaq wasn't on the list.
While Nasdaq currently has a "Moderate Buy" rating among analysts, top-rated analysts believe these five stocks are better buys.
