NASDAQ Stock Exchange: What is and How to Trade?

Nasdaq Stock Exchange

What is the NASDAQ stock exchange?

One of the most prominent electronic markets to sell and buy securities, NASDAQ was established by the NASD (national association of security dealers.), which later got changed to FINRA. (Financial industry regulatory authority). The idea behind creating NASDAQ was to create a transparent and safe space for people to exchange and trade securities. The project was incepted on 8th February ’71

NASDAQ is short for “National Association of Securities Dealers Automated Quotations”.

NASDAQ also indicates an important index for the economy of America that traces almost 3000 stocks that are listed on the NASDAQ exchange. These stocks include a lot of BlueChip Stocks that drive the markets of the USA.

Let’s read more about the NASDAQ Stock Exchange:

NASDAQ: Trading platform

The trading platform currently used by NASDAQ was designed initially to replace the “specialist”. This was the previous system used by NASDAQ and was declared inefficient soon. The model was in use for more than a century before this. Since the internet and technology sectors boomed at almost a similar pace and on the same timeline, the system used by NASDAQ became the standard worldwide pretty soon.

Rise and Fall: During the second half of the 90’s the internet generation was taken by storm by musk, whose Dot Com explosion alongside that of the tech sector together was the reason for the rise and fall, both for NASDAQ. In 1995, the index had touched a never seen before the mark of 1000. The index went on to touch the 5000 marks until 2002 when a heavy correction of almost 80% happened. 

In 200 NASDAQ purchased ESADAQ, which was a European doppelganger of itself. Then in 2007, the operations were discontinued because the Dot com bubble burst. So the NASDAQ was finally taken back and is currently operated by Borse, Berlin.

NASDAQ stock exchange:

There are a few fundamental differences between NYSE and NASDAQ. NYSE is being talked about here because these two are the most significant exchanges when it comes to the American dream of trading.

While NYSE is physically present on wall street, NASDAQ is not there in the physical. For trading, there is a data centre that involves the exchange of securities and shares. NASDAQ also happens to be a dealer’s market. The participants do not sell or buy directly. The orders have to go through a dealer who is a market maker in the case of NASDAQ. The NYSE works differently, but both the exchanges use the market makers to maintain superior liquidity. 

The NASDAQ represents 25 markets that include equities and options too.

Let’s understand some more differences between the NASDAQ and NYSE:

Both NASDAQ and NYSE use market makers so that they can maintain their hand at liquidity, but still, there are some basic differences in the way each of the functions.

While being on the NASDAQ, the market makers maintain an inventory of transactions between customers and dealers. These inventories are a record of all the buy and sell orders that were executed from the market maker’s account and transacted to the customer account.

More than 250 companies provide liquidity to the stocks listed on NASDAQ when it comes to the numbers. 

When it comes to the NYSE, the job to maintain the markets is performed by dedicated market managers. The DMMs are a human bridge between the market and the customers. They are the ones who close and open the auctions and maintain truce if an imbalance occurs. As of 2019, the DMMs were responsible for providing more than 17% liquidity to the NYSE. 

NASDAQ was founded as a wholly-owned company by FINRA in 1972. Back then, it was known as the NASD. (National Association of Securities Dealers). Fast Forward to 2000, NASD kind of went public as it sold its shares for the electric market to its shareholders. 

These shears then got listed on the OTC bulletin board. 

In contrast, the NYSE was founded in 1792 when a group of 24 brokers came together in one single place. The agreement was then called the ButtonWood agreement. Initially, there were only five securities traded on the NYSE, but later, many companies got listed. The first such company was the Bank of New York. For more than 200 years, the NYSE was working as a private company until 2006, when it went public. That is when it saw a merger with one of the biggest firms in Europe. 

NASDAQ Composite Index:

A lot of traders think that the NASDAQ is a tech-heavy index, and also, it is also not understood the way it deserves to be understood. The NASDAQ composite holds listings of the stock that are listed on the NASDAQ. There are a few constraints for the stock to be listed on the NASDAQ composite. These are:

  • The stock cannot be an ETF or another type of security. Only the common stocks are given listings. 

This is the reason why there are so many stocks listed and why they keep on changing frequently. The index is created with the sole idea of representing the entire NASDAQ stock market.

NASDAQ composite happens to be one of the top 3 indexes that the experts generally follow after Dow Jones and the S&P 500. 

How does NASDAQ Stock Exchange work?

Just like all the other indexes around the globe, the NASDAQ is also weighted according to the market cap of the largest companies. This means that if their price levels change, so does the performance levels of the index. The smaller firms and their movement will not affect the performance of the index that much.

To put it into the picture, the movement of the company’s stock that has a cap of $200 Billion will have twice the impact compared to a company with a market cap of $ 1 BIllion. 

How many listed companies are there on the NASDAQ?

The NASDAQ holds around 3000 securities listed. But not all the securities are included, as mentioned above. Securities like ETFs are excluded from this number. According to a popular website, there are around 2485 stocks issued from over 2444 companies on the NASDAQ. This is because of the fact that some companies give more than one class of stock. The index is often considered top-heavy because the top 10 stocks listed on the index are responsible for more than a third of their weight.

NASDAQ 100:

This is a different index and is often confused with the NASDAQ composite. These are two separate indexes. The NASDAQ 100 is the one that trades the top 100 companies listed on the NASDAQ composite.

Investing in index funds is like putting your portfolio on autopilot. If you do not have the time or desire to concentrate on stock for an extended period of time before you invest, then investing in indexes can be a great idea. Investing in index funds can also be understood as investing in a basket of stocks so that the portfolio runs smoothly. 

NASDAQ trading strategies:

Since indices are an essential basket of stocks, there are a lot of correlations between the price of these indices and the markets related. 

The biggest and the only asset that can impact an index and its price movements are the share market. The significant changes in share prices in specific sectors can have an effect on the index, especially if the affected area of the market is where you have decided to trade.

The foreign exchange market is another asset that can impact the prices of an index and its movements. A lot of indices like the NASDAQ are sensitive to the price shift of the exotic currencies. There are also more than enough proofs that clearly tell that there is a relation between the domestic stock and the major index performance. 

This is also the place where research has to be done extensively. Let us look at some other index trading strategies:

Using the market to your advantage:

While trading in indices, the economic data can be something that can be a river of performance, and that is what makes the success for traders. They need to be able to anticipate the market events that can precipitate price movements. 

For this purpose, an economic calendar can be of great use. It can be beneficial to the trading plan that the traders follow and also will allow them to look towards the long term with respect to the data release that can strongly impact the trading position. For instance, if the trader is trading with the wall street index, the major data releases. For instance, if you trade with the Wall street index, significant data releases like the federal reserve rate decisions, unemployment figures, Non-farm payroll data, etc. 

Scalping:

Scalping is one of those trading strategies in which the traders make a lot of different trades in one trading day. Here, the profit potential per trade is low, but when the number of trades adds up at the end of the trading day, they make a surplus amount. The scalpers are more interested in smaller price movements because they are more frequent than the more significant price movements, and since the bets can be a lot more than one, the money made is better than the amount produced by large price movements. 

The scalpers hold their positions for not more than a minute. 

Swing Trading:

Swing trading is something in which the traders ride the waves of price movements. These movements can last from a day to months to years. The holding period can last for these durations longer than the durations for scalping. 

This is because of the fact that swing traders tend to ride the wave of price fluctuation that happens to a stock or an index. 

The price may rise, and it may fall or vice versa. The traders want to make money in any of these situations. 

How can I trade on the NASDAQ?

It is relatively easy to trade on the index if you have a reliable broker by your side. You don’t have to look for that since we bring you the leading online broker HFTrading. The broker has been in the game for a long time and is the trading partner for CTRL investments Pvt. Ltd. 

The parent firm is regulated by the CySEC. Via three different trading accounts, the traders can trade over more than 300 CFD tradable instruments, including exotic assets like forex, cryptocurrencies, and a few more. 

When it comes to the platform, the broker provides one of the best trading platforms that were ever created in terms of forex trading, the MetaTrader 4. 

The broker is completely regulated and provides trading on the indices like the NASDAQ, NASDAQ 100 and a lot more. 

Bottom Line:

Trading on the NASDAQ stock exchange is easier as compared to other indices like the S&P 500 and Dow Jones. This is because of the fact that NASDAQ is further broken into two different indexes separately. 

Trading can be challenging, but it becomes easy with the correct knowledge and the proper application. It has to be kept in mind that before you enter the market, regardless of the asset you are trading on, you should always know what is happening and have the tools ready to mitigate the risks if anything terrible happens. 

 

FAQs

What are CFDs?

CFD stands for contract for differences. These are trading instruments which are primarily based on speculations. The good thing about CFDs is that the traders do not need to hold the underlying asset that they are trading on. 

Is it safe to trade over Indices?

Yes, it is safe to trade over indices, and in fact, it is safer than a lot of other options out in the stock market. The only thing that stops people from doing that is the fact that the growth rate there is slow.

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