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Finance

What is the NASDAQ?

As far as risk goes, it would be safe to wager one’s house on the assumption that at one point or the other, you have come across the term NASDAQ. This assumption would be based on the fact that today, majority of the world’s population is under 45 years of age.

During that time, NASDAQ as a phrase has been bandied around every other day (at least 5 days a week) so chances are it has caught your attention at some point. Well, unless you have not been a resident of Planet Earth. But even then…

Anyway, the aforementioned 45 figure explains the number of years the NASDAQ commenced operations – 46 years to be precise in 2017. Since then, the word has become synonymous with the financial market, the result of which has been a hazy understanding of what it actually means.

And that’s why we’re here.

What is the NASDAQ?

NASDAQ is an acronym which means National Association of Securities Dealers Automated Quotation system.

nasdaq stock market america

Quite a mouthful, we know, but the word is an alteration of NASD (National Association of Securities Dealers), a self-regulatory securities organization which birthed the NASDAQ with the purpose of allowing investors to trade securities on a fast, electronic and transparent system. The word itself can be used to refer to two things.

  1. First, it can be used to mean a uniquely electronic exchange, the first of its kind, where investors can buy and sell stock.
  2. Second, the name can be used as a statistical measure of a chunk of the market, in reference to the NASDAQ Composite Index – which is why you will sometimes hear people say “the NASDAQ is up today”.

So does that imply it is a Stock Exchange like any other?

Well, yes and no.

Yes in the sense that it is indeed a stock exchange with over 3,200 securities listings and witnesses trades averaging about two billion shares a day.

And no in the sense that unlike your regular stock exchanges such as the NYSE (New York Stocks Exchange), the NASDAQ is not based on a physical floor where brokers buy and sell orders on behalf of investors – that frenzied stereotype associated with stock trading? Rather, it is a computerized trading system which involves trading between investors and their buyers and sellers.

nasdaq stock market

Technically though, it is a stock exchange.

The advancement of technology has made the electronic trading model once synonymous with the NASDAQ the standard for markets globally.

How the NASDAQ was established

Perhaps it’s also good to mention how NASDAQ came about. It was formed following an SEC study in the early 1960s that found OTC (over-the-counter) securities (those securities not traded on the “floor” of an exchange) to be fragmented and obscure. The specialist system in place had been in use for close to a century and there was need for a more efficient model.

The responsibility of implementing the new system fell on the hands of NASD who began work in earnest in 1968. It was not until 1971 that the system would be fully in place, and come February 8th of that year, the first trades were made, making NASDAQ the first electronic stock market in the world.

It has grown from 100 listings since its inception to become the world’s second largest exchange in market capitalization after the NYSE. However, the number of listings and traded shares on the NASDAQ trounces that of the NYSE, with a good deal of them, befittingly, made up of tech companies.

In fact, the NASDAQ index is closely followed for its good representation of tech firms, not to mention high-growth companies as well. To date, you will still find a good deal of the tech behemoths from the ‘90s on this index – Intel, Dell, eBay, Apple, Microsoft, Oracle, Cisco, Apple, Google, they’re all here.

Buying and Selling Shares on the NASDAQ

The NASDAQ is what is called a dealer’s market. What this means is that the market participants (investors like you and I) are not buying or selling from and to each other directly. Rather, they have to trade through a dealer. This dealer is known as a market maker.

A traditional exchange such as the NYSE, on the other hand, is an auction market – the name itself should give a rough idea of what goes on. This type of market involves individual investors buying and selling between each other, with a type of auction happening in the process.

This auction involves the highest bidding price (buying price) being matched with the lowest asking price (selling price).

Trading on NASDAQ

NASDAQ stocks are deemed volatile than those on the NYSE, an exchange mostly made up of blue chip stocks and industrials that have been around since the dawn of stock markets, hence more established and stable.

nasdaq stock exchange

As far as trading hours go, the NASDAQ has a provision for extended hours before and after the traditional trading hours which are historically set between 9.30 a.m. to 4.00 p.m. ET. This extension is between 8.00 a.m. to 9.30 a.m. and 4.00 p.m. and 5.00 p.m., and affords traders a window of opportunity for them to respond to global happenings in their trading activity.

And a last fun fact to cap it off…

It is possible to know where a stock is traded by looking at its symbol. Stocks traded on the NASDAQ have 4 or 5 characters. Example, AMZN, AAPL and GOOG. Those on the NYSE or AMEX tend to have 1 to 3 characters. For example, “F” for Ford or “DIS” for Walt Disney.

Now you know.

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