Investor Facts: What Is The NASDAQ?

NASDAQ is a stock index that broadly represents the technology sector of the U.S. economy.

Beginning in 1971, the National Association of Securities Dealers (NASD) began to use an electronic trading platform to transact certain shares. It thus abandoned the traditional trading floor.

The “AQ” part of the name signifies “automated quotations,” a nod to its electronic trading features.

The resulting trading system was soon adopted by then-small technology companies. As those companies grew, so did the importance of the 3,000-plus stock index known as the NASDAQ Composite.

Today, evening news reports include closing data from the S&P 500, an broad index of U.S. stocks, the narrower, 30-company Dow Jones Industrials Average (DJIA) and the NASDAQ Composite.

Most investors first paid attention to the NASDAQ when it zoomed skyward during the dot-com boom. Many of those small companies in the composite no longer exist, victims of the dot-com crash.

Yet the major difference between NASDAQ and its peers is not the clients it serves but its highly efficient trading system. NASDAQ was the world’s first electronic trading system and remains the model for new exchanges worldwide.

The fundamental innovation of the company was to narrow the gap between the “bid” and “ask” price for a traded security.

Before, stocks traded between human traders known as specialists. The difference between the price sought by a buyer (the “bid”) and the price quote returned by a seller (the “ask”) was known as the spread.

Specialists took this difference as their payment for managing the stock transaction. As trading become entirely electronic, the spread between bid and ask shrank.

Tech giants

The NASDAQ thus become a more attractive exchange for companies and grew steadily in influence and size.

Many tech companies that are giants today — including Apple, Google, Amazon and others — remain part of the NASDAQ composite.

However, it is not the case that the NASDAQ is all or even mostly about technology. In fact, it is the No. 2 exchange worldwide as measured by the size of the companies it transacts, behind only the New York Stock Exchange.

Meanwhile, stocks traded on the composite today include pizza delivery companies, biotech firms, energy firms, banks and even a coal company.

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