As a powerful and popular economic barometer, understanding what the Nasdaq is, how it operates, and why it matters can offer invaluable insights into the dynamics of modern investing and help shape strategies aligning with your financial goals. This article explores the same.

What is the Nasdaq?

The Nasdaq—short for the National Association of Securities Dealers Automated Quotations—is one of the largest stock exchanges in the world, home to over 3,000 publicly traded companies (many of which are leaders in technology and innovation such as Apple, Microsoft, Amazon, and Tesla). Although the exchange is indeed associated with the tech industry, it also includes companies from other sectors such as healthcare, consumer goods, and financial services.

What sets the Nasdaq apart from other exchanges like the New York Stock Exchange (NYSE) is an electronic trading system that uses an automated network of computers to match buyers and sellers: boosting efficiency and transparency, providing real-time price quotes, and allowing for trades executed in milliseconds. The Nasdaq also operates as a dealer market whereby market makers facilitate trades by quoting buy and sell prices for securities, a structure contrasting with the NYSE auction market wherein human brokers play a more active role on the trading floor.

Nasdaq Composite vs Nasdaq 100

Before diving deeper into a Nasdaq-centric discussion, we should clarify the two different indices most commonly associated with the same: the Nasdaq Composite and the Nasdaq 100. While both indices are associated with the Nasdaq exchange and emphasize tech-heavy companies, they serve different purposes and track different groups of companies.

While the Nasdaq Composite is a broad market index that includes nearly all 3,000+ companies listed on the Nasdaq stock exchange—representing a wide variety of industries but heavily weighted toward technology and innovation-focused companies, per the exchange’s historical association with the tech sector—the Nasdaq 100 is a more focused subset of this. More specifically, it tracks the 100 largest non-financial companies listed on the Nasdaq (including prominent names in technology, healthcare, consumer goods, etc.) and is more heavily weighted toward tech companies. This narrower focus on large-cap, high-growth companies makes it a popular benchmark for investors interested in the performance of leading innovative businesses.

So, which index should you use? The answer ultimately depends on what you’re looking for as one isn't necessarily “better” than the other. While the Nasdaq Composite provides a more comprehensive view of the market, the Nasdaq 100 is more focused—and even more tech heavy—than its counterpart.

History of the Nasdaq

Today’s markets (and arguably the US economy) are so interwoven with technology that it may seem like all major US indices are heavily tech weighted. So, why is the Nasdaq more strongly associated with the tech industry and innovation than others? Let’s examine its history to find out.

Founded in 1971, the Nasdaq made history as the world’s first electronic stock exchange and revolutionized the industry by introducing a fully electronic trading platform at a time when traditional exchanges (e.g., the New York Stock Exchange (NYSE)) relied on in-person trading on physical trading floors. Its creation was spearheaded by the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA), to provide a more efficient and transparent way to facilitate trades.

The Nasdaq initially functioned as a quotation system, displaying prices of securities traded over the counter (OTC) as an informal stock exchange that didn’t connect buyers and sellers directly. It quickly grew in importance, however, attracting companies that preferred its innovative, technology-driven model over traditional exchanges.

The 1980s marked a pivotal period in Nasdaq history when it emerged as the go-to exchange for technology companies. Many tech giants—including Microsoft and Apple—chose the Nasdaq for their initial public offerings (IPOs), this association with cutting-edge industries solidifying its reputation as a hub for growth-oriented and innovative companies.

In 1991, then, the Nasdaq became the first stock market to offer online trading: building on its legacy of leveraging technology to enhance accessibility and efficiency. Throughout the 1990s and early 2000s, the Nasdaq became synonymous with the tech boom and hosted many of the largest and fastest-growing companies in the world.

The Nasdaq has also experienced various challenges, however, such as when the dot-com bubble burst in the early 2000s caused by rampant tech company speculation. The exchange eventually rebounded following significant losses and maintained its status as a leader in global markets.

Today, the Nasdaq is one of the world’s largest and most influential stock exchanges and continues to prioritize innovation while expanding its offerings to include financial products such as exchange-traded funds (ETFs), derivatives, and indices: solidifying its role as a global financial powerhouse.

Nasdaq companies

To be listed on the Nasdaq, companies must meet strict financial and regulatory criteria that vary depending on the market tier they're joining:

Nasdaq Global Select Market: The highest tier, this consists of large, high-quality companies that meet stringent earnings, liquidity, and corporate governance standards.
Nasdaq Global Market: This tier includes mid-sized companies that meet slightly less rigorous standards than the Global Select Market.
Nasdaq Capital Market: Designed for smaller or emerging companies, this tier requires lower financial thresholds while still maintaining governance and disclosure requirements.

These prerequisites seek to ensure listed companies are financially stable and transparent so investors can have confidence in the market.

How is the Nasdaq calculated?

The Nasdaq Composite and Nasdaq 100 both use a market-capitalization weighting system, meaning companies with higher market capitalizations—calculated by multiplying a company’s stock price by its outstanding shares—have a greater influence on index performance than others.

Just how big an influence?

As of June 30 2025, the top 10 companies in the Nasdaq 100 comprised over 68% of the index. Even more dramatically, the top five alone accounted for 51%. This means that even though the index tracks 100 companies, over one-third of its performance was based on only five companies at this time. Arguably, tech has an outsized impact on the current US economy—so this weighting is valid—but investors should understand and keep in mind this influence often comes with higher levels of volatility and can obscure non-tech company performance (if tech stocks perform poorly, for example, it may look as if the entire index fared poorly and vice versa).

The Nasdaq vs other indices

The Nasdaq Composite, Nasdaq 100, S&P 500, and Dow Jones Industrial Average (Dow) are some of the most widely recognized stock market indices but differ significantly in their composition, methodology, and focus—with these disparities having important investor implications with respect to portfolio strategy, risk exposure, and market insights.

As previously discussed, the tech-heavy nature of the Nasdaq (Nasdaq Composite and Nasdaq 100) makes it more volatile—especially during market cycles that impact growth sectors—whereas the S&P 500 comprises 500 of the largest publicly traded companies across a wide range of industries, offering investors a broader and more diversified view of the overall U.S. economy. As with the Nasdaq, the S&P 500 is also market-capitalization weighted (meaning tech still has an outsized influence here).

The Dow includes just 30 large, established companies and is price weighted (unlike the Nasdaq and S&P 500), meaning companies with higher stock prices exert more influence on the index regardless of their market capitalization. The Dow is considered a gauge of blue-chip companies and industrial strength but lacks the diversification of the other two indices.

So, what exactly do differences between the Nasdaq, S&P 500, and Dow mean for investors? The Nasdaq is perhaps ideal for those seeking exposure to the technology sector or high-growth companies but with a focus that makes it more volatile and potentially riskier than other options. It tends to outperform during tech booms but may underperform in broader economic downturns or when interest rates rise, as growth stocks are more sensitive to borrowing costs. With its broader sector representation, the S&P 500 is considered a more reliable barometer of the overall U.S. economy—appealing to investors seeking long-term stability and moderate growth—whereas the Dow (while iconic) is less representative of the broader market due to fewer companies and its price-weighted structure. It's thus less useful for assessing market trends or constructing diversified portfolios but still valuable as a benchmark for blue-chip performance/investor sentiment and a useful alternative for those interested in viewing performance that's not market-cap weighted (given the nature of its calculator).

The takeaway: the importance of the Nasdaq

As with any index, the Nasdaq is a tool—the value of which depends on proper use—and often associated with growth opportunities/technological advancements among investors but with greater volatility than other indices. Understanding the Nasdaq’s unique characteristics, its focus on innovation, and its role within the broader financial ecosystem can help investors make more informed decisions.

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What is the Nasdaq, and Why is it Important in Investing?