Nextwave Finance

The Nasdaq Composite Index

October 22nd, 2008 | by admin |

Financial indexes play a major role in how Americans, in fact how people globally, determine how their economy is doing. A financial index measures the day to day movement of stock markets. Indexes have become a yardstick of the economy. One of those financial indexes is the NASDAQ Composite Index.

The NASDAQ was introduced in 1971. NASDAQ is an acronym for National Association of Securities Dealers Automated Quotations. However, the NASDAQ Composite Index has evolved in its thirty-seven years from a quote service to a major index of 2,985 securities.

As we have all watched the stock markets rise and fall on a daily basis, the financial indexes have become household words. The DOW Industrial Average Index deals with only thirty of the largest companies in America. Only extremely large companies who are stable are allowed on the DOW. An example of their elitism is the fact AIG, the once largest insurer in America, was kicked off the DOW recently when they went into bankruptcy.

The DOW doesn’t measure a broad base. Another index is the S & P 500. This index measures what the stocks of the 500 largest companies in the United States are selling for. This index again, though more broad based than the DOW, focuses on large companies. On the other hand, The NASDAQ Composite Index measures a large number of smaller companies and growing companies. It is also not just a United States Index because it allows international companies to participate in its index.

Consequently, the NASDAQ reflects a global economy. Since it focuses on smaller companies, it is heavy into technology stock. That is why the NASDAQ fell so dramatically when the technology or dot-com bubble burst in 2001-2002. Each of these indexes is measuring different companies in different market segments. To really understand what the economy is doing, all three of these indexes should be watched.

The NASDAQ Composite Index measures the stocks on their index not just by share price as some indexes, but it takes into consideration the market value or market capitalization. This means the stock price times the number of shares outstanding. Essentially, this translates into what the market thinks each company is worth. Larger companies have more weight on the index than smaller companies.

The NASDAQ has shown losses like the other indexes. In one year’s time, the NASDAQ Composite Index has lost over 1,100 points. As we all know, that could go up or down dramatically tomorrow. Watching the NASDAQ is helpful to investors who are invested in technology stocks or small companies. If those types of companies are what you are interested in investing in, then watch the NASDAQ. If you want a barometer of the economy, keep an eye on all the indexes.