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Most investors are familiar with the Nasdaq Composite Index. It is hard not to be, as it is one of today’s better-known and most popular stock indexes.
However, it is also one of the least understood in terms of how it works. One of the most probable reasons being that, unlike many others, the Nasdaq operates as a tech-heavy stock index.
What is the Nasdaq Composite Index?
Initially, the groundwork from which the Nasdaq manages itself doesn’t differ that much from what commonly takes place for other stock indexes. It is a list that continually tracks numerical data regarding a particular group of companies’ performance over time. However, there are still many differences in play.
For starters, the Nasdaq only considers those companies that are included within the Nasdaq Stock Exchange. That in itself isn’t as easy as it sounds since one must be listed exclusively on the Nasdaq market and be a common stock offered by an individual company to be included.
That means that ETFs are out of the question when it comes to being included in the Nasdaq.
Also, Nasdaq usually has an extensive focus of companies with efforts in the technological sector. For that reason, the Nasdaq is generally considered the best reference available for how well the tech market is performing overall.
How does it work?
Like the S&P 500, it is an index that gives weight to the market caps of the companies included within the index.
This means that when larger companies’ stocks move, it usually has a more significant influence on the index than smaller companies.
Because of the nature of today’s tech-based companies, the values shown in the Nasdaq Composite Index tend to fluctuate with great ease at any hour of the day.
The companies included in the Nasdaq
As of the end of 2019, 2,065 stocks provided by over 2,035 companies are included in the Nasdaq. Just as it can be appreciated with other indexes, like the S&P 500, some companies offer more than one stock option in the market.
Because of how the index values are managed, the ten largest stocks account for at least one-third of the index’s performance. To give you an idea of the Nasdaq’s current status, here are the highest companies on the list:
- Alphabet Class C
- Alphabet Class A
- Cisco Systems
How to invest in the Nasdaq
The easiest way to invest in this index is by using an index fund set to track the Nasdaq.
Index funds are tools that only need you to specify which index to look for, and then they’ll automatically make investments in your name based on the information currently being shown. Keep in mind that they’re meant to mimic the performance of the market itself, so there won’t be a chance to “beat the market,” as they say.
While also being Nasdaq-Based, the Nasdaq 100 is an entirely different index. It operates like the Nasdaq Composite Index in terms of its inner workings and how the values are managed.
However, what sets it apart is that it instead tracks and includes only the 100 largest non-financial companies found in the Nasdaq Composite Index.
When looking to invest in Nasdaq, be mindful that you must base your investments on the right information. Other than that, investing in Nasdaq 100 works exactly the same way.
Why should you invest in Nasdaq Composite Index?
As with many index-fund types of investments, it represents an excellent opportunity to build wealth with minimum input from your side. This is an ideal solution if you’re looking to invest but don’t have the time to research and manage individual stocks.
Billionaire investor Warren Buffet has spoken on behalf of index funds, calling them the “best choice for any American to start investing.”
Even if you are comfortable researching and managing stock after stock, it is still an excellent opportunity to expand your portfolio and get even more profit from it.
By using the Nasdaq Composite Index, you are being offered lots of exposure to today’s tech industry, as well as tomorrow’s, to grow your portfolio.