The Nasdaq Composite Index: What Is It and What Does It Measure?

The Nasdaq Composite Index: What Is It and What Does It Measure?

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Launched in 1971, the Nasdaq Composite is a well-known US market average. Weighted by market capitalisation, this index tracks approximately 3,500 companies (both international and domestic) listed on the Nasdaq Stock Market. Interestingly, the early 1970s also witnessed the aforementioned stock market eliminating floor trading and transitioning to an entirely electronic stock market.

Traders and investors use the Nasdaq Composite as a means of gauging investor sentiment and comparing performance (relative return). Importantly, it also provides a valuable snapshot of the growth and technology sector. Year to date, the Nasdaq Composite is up +1.8%, following an eye-popping return of more than 40% in 2023. 

Breaking Down the Nasdaq Composite Index

Overview –

Together with other headline US market indexes, such as the Dow Jones Industrial Average, the S&P 500 and the Nasdaq 100, the Nasdaq Composite is a widely followed market average that covers all the stocks listed on the Nasdaq Stock Exchange, the second-largest stock exchange behind the New York Stock Exchange (NYSE) which lists approximately 2,400 companies. Of relevance, the Nasdaq Composite obviously also covers all of the companies listed in the Nasdaq 100 market index, which is heavily weighted towards the technology sector.

Constituents and Industry Breakdown –

Given the Nasdaq Composite is weighted by market capitalisation and houses some of the largest companies in the world, the top constituents can and often do have a meaningful effect on the overall index’s price movement. Among the thousands of stocks covered in the Nasdaq Composite, the Magnificent Seven Stocks stand out in this index, consisting of mega-cap US tech companies that command a large presence. The seven stocks comprise Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Nvidia (NVDA), Meta Platforms (META), Tesla (TSLA) and Alphabet (GOOG). The Magnificent Seven Stocks were actually responsible for more than two-thirds of the gains in the Nasdaq Composite last year. 

According to the Nasdaq Composite factsheet, the top companies are Microsoft and Apple, which together claim more than 20% of the total index weight. They are followed by Nvidia, Amazon, and Meta Platforms, which, as shown in the table below, also claim more than 20% of the total weight.

Regarding industry breakdown, as per the Nasdaq Composite factsheet, the technology sector controls nearly 60% of the weighting, followed by consumer discretionary at approximately 17% and then healthcare and industrials at 7% and 4%, respectively.

Eligibility Breakdown –

The Nasdaq Composite index only includes companies listed on the Nasdaq Stock Exchange. This is the only eligibility requirement; there is no geographic, industry sector, market cap or liquidity eligibility criterion. 

However, stocks must be either common stocks, limited liability companies, limited partnership interests, or ordinary shares; they cannot be closed-end funds, convertible debentures, ETFs (Exchange-Traded Funds), preferred stocks, or warrants, as well as other derivative securities. 

Can I Trade the Nasdaq Composite?

You cannot trade the Nasdaq Composite Index directly, as it is simply a mathematical calculation to form a market average. However, trading derivative contracts and ETFs on their underlying price movement is an option. 

Trade Contract for Differences (CFDs) with FP Markets –

At FP Markets, you can access global market indexes from a single trading platform, such as MetaTrader 4 (MT4), MetaTrader 5 (MT5) and cTrader. From the Nasdaq to the UK’s FTSE 100 and Australia’s ASX 200, trading CFDs with FP Markets offers a cost-effective and straightforward way of gaining exposure to the global markets, which are always cash-settled. 

Exchange-Traded Funds –

ETFs are largely designed to track the performance of specific market indexes and function similarly to stocks on an exchange. At FP Markets, you can trade the Invesco QQQ Trust ETF as a CFD product, which tracks the stocks listed on the Nasdaq 100. 

Futures and Options Markets –

The futures and options markets offer derivative products based on the Nasdaq Composite, which are essentially agreements to buy and sell the index at a predetermined price and date in the future. For options markets, this also provides traders with the right, but not the obligation, to buy and sell the index over a specific period. Note that, like CFDs, these financial derivatives are cash-settled.

Nasdaq Composite FAQs:

1. What is the Nasdaq Composite Market Index?

The Nasdaq Composite is a broad market index that tracks the performance of approximately 3,500 companies listed on the Nasdaq Stock Exchange. It is one of the largest and most popular stock market indexes available today. Be aware that some market pundits refer to the Nasdaq Composite as simply ‘Nasdaq’.

2. What are the Top Stocks Covered in the Nasdaq Composite?

The top companies listed on the Nasdaq Composite include Microsoft, Apple, Nvidia, Amazon, Meta Platforms, Google, Broadcom, Tesla, and Costco. Since these companies control a majority of the weight within the index, their share prices can have a meaningful effect on the overall direction of the Nasdaq Composite.

3. Can I Trade the Nasdaq?

You cannot trade the Nasdaq directly. However, alternative vehicles, such as derivative products and ETFs, allow you to trade the underlying price movement. You can open either a demo or live trading account today with FP Markets and start trading CFDs. Learn more about how to trade the financial markets here.

4. Are There Other Major US Equity Indices?

Yes. Joining the Nasdaq Composite are the Nasdaq 100, the Dow Jones Industrial Average, the S&P 500 and the Russel 3000 and Russel 1000.