Second only to the New York Stock Exchange, Nasdaq is one of the world’s largest securities and stock exchanges. It is a transparent marketplace created in 1971 to streamline the trade of securities.
Offering people the ease to trade digitally without any hassle and chaos, it is the brainchild of the National Association of Securities Dealers or NASD.
The NASD brought this system into existence after understanding the struggles of people operating on Wall Street. Nasdaq OMX has its headquarters in New York, but the business is everywhere – it is electronic.
The word “Nasdaq” is also a term for the Nasdaq Composite – an index beyond 3,000 stocks that the Nasdaq exchange lists. To understand its significance, picture this – this index includes the world’s leading tech and biotech giants. Apple, Amazon, Intel, and Microsoft are a few such names.
If you want to learn more about how Nasdaq operates, you have chosen just the right article! Read on till the end to grasp every tiny detail about Nasdaq’s machinery and operations.
How Did The Nasdaq Originate?
Originally, Nasdaq stood for the National Association of Securities Dealers Automated Quotations. Its creators hoped for it to be an effective supplement to the inefficient “specialist” system. That system had been the norm for almost a century.
With the commencement of its operations on February 8, 1971, Nasdaq officially paved the way for a revolution in the trading world. From the time of its creation, it adopted a design that provided automated quotations. However, it also frequently facilitated OTC trading, which eventually gave it synonymy with OTC markets.
Over the years, it grew into a real stock market with the addition of trade and volume reporting. In essence, the NASD created it to give investors the power to trade securities efficiently and safely through an electronic medium.
With no physical platform, all trading would take place via an automated network of computers. The electronic model made it rise to the top in subsequent years.
In their early years, the current technology leaders opted to list on Nasdaq since it was heading the technology trading platform. As the tech sphere became exponentially bulkier in the 1980s and 1990s, Nasdaq became the widely accepted standard.
The Nasdaq Index went beyond the 1,000 mark in 1995, peaking at 4,500 in 2000 and then dipping nearly 80% in 2002.
In 2006, Nasdaq became independent from the NASD and started functioning as a national securities exchange. The following year it joined hands with OMX, a Scandinavian exchange group that is the largest exchange company internationally. It powers at least one in ten of the world’s transactions in this area.
Nasdaq And Its “Firsts”
Nasdaq was not only the first fully electronic trading platform but also the first exchange that launched a website. Additionally, it was also the first to sell its technology to various exchanges and the first to save records on the cloud.
How Does Nasdaq Work?
Nasdaq is a dealer’s market, so all trades by investors over the electronic exchanges pass through dealers instead of direct auctions. These dealers are the “market makers.”
Like the New York Stock Exchange, Nasdaq is free for trading activities starting 9:30 AM ET, closing at 4:00 PM ET.
In addition to this, however, Nasdaq can also give traders the privilege of pre-market and post-market trading hours. The early hours are from 4:00 AM ET to 9:30 AM ET, and the later hours begin at 4:00 PM ET and end at 8:00 PM ET.
A company needs to meet specific requirements for a stock or security to land a place on the Nasdaq’s electronic exchange. It must:
- Meet specific financial, liquidity, and corporate governance necessities
- Have a registration with the SEC or Securities Exchange Commission
- Have a minimum of three market makers
- Clear other requirements concerning trading volume and the size of the company
The nasdaq website has all the details about the listing process as well as requirements.
Upon the submission of an application, it can take anywhere from four to six weeks for approval.
Nasdaq Market Tiers
The Nasdaq stock market comprises three distinct market tiers.
The Capital Market or NASDAQ-CM small-cap is an equity market. It is for companies with comparatively lower levels of market capitalization. The listing requirements are more flexible for small-cap companies than they are for other Nasdaq markets.
The Global Market or NASDAQ-GM mid-cap consists of stocks that reflect the Nasdaq Global Market. It has 1,450 stocks that satisfy the stringent financial and liquidity requirements plus corporate governance standards that Nasdaq has in place. The Global Market is more exclusive than the Capital Market.
Global Select Market
The Global Select Market or NASDAQ-GS large-cap is a market capitalization-weighted index that comes from US-based and international stocks representing the Global Select Market Composite. The Global Select Market holds about 1,200 stocks that are there only after a super strict requirement-based screening. It is the most exclusive of all the Nasdaq market tiers.
Nasdaq vs. New York Stock Exchange
The Nasdaq and New York Stock Exchange or NYSE form a significant portion of stock trading. The two markets do have their differences, and it is essential to note them for smart decisions.
While Nasdaq is an entirely electronic trading system, the NYSE has the added factor of a physical trade floor.
Nasdaq is not a direct market, but the NYSE is an auction market that facilitates direct trades.
In addition to this, the former has a narrower and more focused market with tech companies, while the latter has a vast and broad market.
Lastly, Nasdaq is highly volatile and growth-oriented than the NYSE.
The bulk of the Nasdaq stocks belong to blue-chip companies and technology establishments. Thanks to this, it has had a solid overall performance in the last quarter of the 20th century. The returns are generally excellent and on the rise.
The electronic trading platform is an intelligent way to go for traders with technological ambitions.