INTRO: If you’ve ever watched a video about the
stock market, you’ve likely heard the term Nasdaq, but it’s often used in significantly
different contexts.
Sometimes, people are referring to an index like the S&P 500 or the Dow Jones.
Othertimes, people are referring to a stock exchange similar to the NYSE or the London
Stock Exchange.
And in other cases, people are talking about a publicly traded company called the Nasdaq.
Given all these different definitions, it’s easy to write off the Nasdaq as just some
other gear in the financial markets.
But, the Nasdaq is actually the lifeblood of the biggest tech companies in the world
including Apple, Microsoft, Amazon, Tesla, Nvidia, and Google.
What’s even crazier is that the NASDAQ is by no means a heritage player in the stock
market.
In fact, the NASDAQ wasn’t even created till 1971.
For perspective, the NYSE was founded in 1792.
Despite this short history, the NASDAQ has become the king of the modern stock market.
So here’s exactly what the NASDAQ is and how it squashed legacy players to the top.
COMPANY: Starting with the origins of the NASDAQ, we
have the company behind everything.
The story of the company dates back to the late 1960s when Wall Street was struggling
to keep up with demand.
This was because the 1960s was one of the most prosperous times in the US.
The economy was booming, wages were skyrocketing, and GDP growth was through the roof.
In fact, real GDP growth averaged 5% throughout the 1960s and US payrolls increased by 32%.
To top it all of, the US would reach the moon near the end of the decade so the everyday
American was feeling more confident than ever before leading them to take a dabble with
the stock market.
At the time, the go to exchange to buy stocks was the New York Stock Exchange or the NYSE.
This drove unprecedented amounts of volume into the NYSE.
By the start of the 1970s, the average daily trading volume was 12 million shares per day.
This might not sound like much compared to the billions of shares that are traded on
a daily basis today, but given that the NYSE was only open for 5 hours per day in the early
1970s, we’re talking about executing 667 shares every single second.
While this was great for business, the NYSE had extremely difficulty handling all these
trades.
After all, they didn’t get any help from computers, so they had to manually execute
and keep track of every trade that took place.
Seeing this rapidly compounding issue, the National Association of Securities Dealers
or the NASD decided to create an electronic stock market called the NASDAQ or the National
Association of Securities Dealers Automated Quotations.
And this gave rise to the world’s first electronic stock market on February 8, 1971.
In the beginning, the NASDAQ wasn’t exactly an electronic stock market per se given that
they didn’t actually execute any trades electronically.
Rather, they were more of a quotation service that allowed investors to electronically see
the live prices of the various stocks listed on the platform.
When it came to actually executing trades, however, this was still done manually.
But, it didn’t take long for the NASDAQ to introduce electronic execution as well.
STOCK EXCHANGE: Over the next few decades, the NASDAQ introduced
one feature after another from automatically tracking daily volume to the electronic execution
of trades.
Given the relative ease of the NASDAQ stock exchange, a lot of investors and especially
traders flocked towards the exchange.
By the early 1980s, the NASDAQ accounted for 37% of the entire US securities market and
it wasn’t long before the crossed the 50% mark.
But, despite the extreme popularity of the NASDAQ, it was never that respected.
In fact, the NASDAQ was often referred to as an OTC market or an over-the-counter market.
If you’re not familiar with this term, it basically refers to the trading of stocks
that aren’t listed on the major stock exchanges such as the American Stock Exchange or the
NYSE.
The term OTC is generally used with a negative connotation as it’s closely related to the
trading of garbage penny stocks.
Despite this negative association, some up and coming tech companies like Microsoft and
Apple who understood the power of electronic trading started to embrace the NASDAQ.
This didn’t change the perception of the NASDAQ overnight, but it did cause investors
to take the NASDAQ more seriously.
After all, Microsoft and Apple were by no means penny stocks.
The Apple IPO, for example, minted 40 millionaires and made Steve Jobs a centimillionaire.
Throughout the rest of the century, the NASDAQ dominated the tech IPO scene and they made
ground breaking progress within the financial markets.
For example, in 1992, the NASDAQ partnered with the London Stock Exchange which marked
the first time that the capital markets of different continents were linked together.
But unfortunately, as the millennium came to a close, so did the NASDAQ’s positive
reputation at least for the short term.
You see, in the early 2000s, we saw one of the most painful stock market crashes in history
called the dotcom crash.
Fortunately, everyday people weren’t really affected by this crash and most of them don’t
even know this took place.
But, if you were invested in tech companies, you got slaughtered.
And given that basically every tech company you can think of was listed on the NASDAQ,
the NASDAQ become associated with extreme speculation and massive losses.
While this wasn’t a great situation for the NASDAQ, they continued to push forward
the financial markets by leveraging the internet.
In 1998, the NASDAQ became the first US exchange to offer online trading.
And the NASDAQ started using the slogan “the stock market for the next hundred years.”
The NASDAQ also started acquiring and partnering with a bunch of foreign exchanges and they
rebranded these as NASDAQ exchanges.
This led to the rise of NASDAQ Copenhagen, NASDAQ Stockholm, NASDAQ Helsinki, NASDAQ
Iceland, and so on and so forth.
So, in the end, the company NASDAQ is simply a conglomeration of stock exchanges from around
the world.
But, as we discussed in the beginning, this is not the only thing that they’re known
for.
INDICES: If people aren’t referring to the company
or the exchange when the say NASDAQ, they’re likely referring to the NASDAQ indices.
Similar to the S&P 500 and the Dow Jones, the NASDAQ offers a few indices that have
grown to be quite popular.
The two most popular NASDAQ indices are the NASDAQ composite index and the NASDAQ 100.
People often get confused between these two and their nearly identical prices doesn’t
exactly help with this situation, but there is a major difference.
The NASDAQ composite index was founded alongside the company way back in 1971.
And this index tracks all of the equity securities that are listed on the NASDAQ stock market
which includes over 2500 stocks.
Initially, the index was launched with a price of $100 and given that the NASDAQ composite
currently stands at over $12,000, we’ve seen a 120X return on this index since inception.
For perspective, the S&P 500 has grown 42X during the same time period.
Moving onto the NASDAQ 100, this is a conglomeration of the 100 largest non-financial companies
that are listed on the NASDAQ.
The NASDAQ 100 wasn’t introduced till 1985, but given that it’s not only filled with
a bunch of tech stocks but also that it doesn’t include any of the slowed moving financial
stocks, I don’t think you’d be too surprised to hear that the NASDAQ 100 has already produced
a 100X return.
But, it should also be noted that when we experience a downturn, the NASDAQ 100 gets
slaughtered.
During the dotcom crash, for example, the NASDAQ 100 sold of 83%.
So, if you’re looking to invest into the NASDAQ 100, you definitely need to be able
to stomach some volatility.
Anyway, the NASDAQ composite and the NASDAQ 100 aren’t the only two indices from the
NASDAQ though they are the most popular.
There’s also the NASDAQ Global Equity Index, the NASDAQ Golden Dragon China Index, the
PHLX semiconductor index, the OMX Stockholm 30 index and so on and so forth.
Moving on from all these indices, the NASDAQ also has their own stock.
During the height of the dotcom bubble in 2000, the NASD decided to start selling their
stake in NASDAQ.
They started off with a private placement offering, and shortly after, shares of the
NASDAQ started trading on OTC markets.
And eventually, on February 9, 2005, the company NASDAQ was listed on the NASDAQ stock exchange.
The ticker symbol for the company is NDAQ and they currently sit at a $25 billion valuation.
Clearly, embracing the digital world has played out quite well for them.
NASDAQ VS NYSE: Alright so, the NASDAQ primarily rose to fame
by embracing technology.
First they embraced electronic trading and then they embraced online trading.
This attracted a bunch of tech firms to their exchange and this is how they became super
famous.
But, nowadays, everyone has electronic and online trading, so why do modern tech companies
continue to choose the NASDAQ over the competition.
Well, looking at it from a common sense perspective, would you want to list your stock on an exchange
that has lagged in innovation or would you rather list it on an exchange that has lead
the curve.
The answer is obvious, but innovation is not the only reason companies tend to go with
the NASDAQ.
Another major reason is cost.
If you want to list 75 million shares on the NYSE, you’re looking at an upfront $360,000
plus an annual listing fee of $71,000.
If you’re looking to list the same 75 million shares on the NASDAQ capital market, however,
you will be paying a slightly higher annual fee of $79,000, but the upfront fee is significantly
less at $75,000.
At this rate, it would take 35 years for the NYSE to become the cheaper option.
Something else to consider is that the NYSE also has more logistical requirements.
For example, all companies listed on the NYSE must have an independent compensation committee
and an independent nominating committee.
NYSE companies must also have an internal audit function and corporate governance guidance.
As you would guess, none of these factors are requirements with the NASDAQ.
So, if you’re simply looking at cost, logistics, and innovation, NASDAQ is the easy choice
to make.
However, a select group of companies continue to use the NYSE over the NASDAQ for a few
reasons starting with prestige.
As we discussed, the NASDAQ is often associated with extreme speculation and insane volatility,
and this association puts off a lot of investors.
Also, it should be mentioned that the NYSE goes out of their way to reduce volatility.
According to the NYSE website, their exchange is 51% less volatile at the open and 52% less
volatile at the close.
So, companies that are less growth oriented and more stable like financial institutions
and insurance companies often choose to list on the NYSE over the NASDAQ.
This natural divide has made the NYSE the go to place for value investors and the NASDAQ
the go to place for growth investors.
This doesn’t really matter for the end user though given that both exchanges are offered
at basically every brokerage you can think of.
NASDAQ EXPLAINED: At the end of the day, none of the components
of the NASDAQ are particularly hard to understand.
The reason that it’s often confusing is simply because the same name refers to so
many different things.
It would’ve been way better if each of them had a different name, but unfortunately, this
is the system we have.
First there’s the NASDAQ company which is charge of handling the NASDAQ exchange.
Then, there’s the NASDAQ indices which primarily include the NASDAQ composite index and the
NASDAQ 100 index.
And finally, there’s the stock of the NASDAQ company itself.
Over past few decades, the NASDAQ has proven to be the more innovative exchange with much
looser policies which has made them a favorite amongst growth companies.
But, a lot of companies in legacy industries continue to prefer the NYSE and that’s the
NASDAQ explained.
If you were the owner of a multi-billion company, would you list it on the NASDAQ or the NYSE?
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