A complete guide on how to invest on the Nasdaq: what it is and which companies the index includes, how it works and how to expose yourself to the market.
With the boom of large tech companies on the stock market, many novice Italian investors are wondering how to invest on the Nasdaq. As a matter of fact, the relevant US stock index is highly exposed to technology, following the trend of the largest capitalization companies in the US.
What is Nasdaq
The Nasdaq is the second largest stock exchange in the world, second only to the New York Stock Exchange (NYSE), while the Nasdaq Composite is a US stock market index consisting of stocks listed on the Nasdaq stock exchange.
An acronym for National Association of Securities Dealers Automated Quotation, the Nasdaq is a stock market index that reflects the performance of technology companies listed in New York. Founded on February 5, 1971, the Nasdaq has become one of the leading indicators of the US economy and has over 3,000 listed companies with a total market capitalization of over $11 trillion.
In order to be included in the index, the company’s shares must be listed exclusively on the Nasdaq market. Furthermore, these must be ordinary shares, therefore excluding preferred shares, ETFs and any other type of security. Instead, real estate investment trusts (REIT), ADRs (American Depositary Receipt, depositary receipts issued by a US custodian bank representing shares of foreign companies) and shares of limited partnerships may have access (S.a.s.).
This is why there are several stocks in the Nasdaq Composite – this index is designed to be representative of the entire Nasdaq stock market, not just large-cap companies.
The Nasdaq Composite is one of the most followed stock indexes in the United States and the world, together with the Dow Jones Industrial Average and the S&P 500.
Warning: The Nasdaq 100 is also weighted by market capitalization and is often confused with the Nasdaq Composite, but there is one big difference. Instead of including all common stocks traded on the Nasdaq stock exchange, the Nasdaq 100 includes only the stocks of the 100 largest publicly traded non-financial corporations. The 101 companies in the Nasdaq 100 make up more than 90% of the weight of the Nasdaq Composite.
Because the Nasdaq has a high concentration of tech companies, the Nasdaq Composite Index is often considered a good barometer of tech sector performance.
Founded in 1971, the Nasdaq market is known for introducing an electronic mechanism for trading shares, expanding the pool of active investors on the market. In fact, at the time, Nasdaq was the first stock exchange to allow investors to buy and sell through a computer-based electronic system. In the years since, it has maintained its connotation as a technological market, attracting the attention of the world’s biggest technological companies.
Why invest in the Nasdaq
Investing in Nasdaq offers several benefits to investors looking to participate in market-leading technology companies’ success, including:
- Broad Range of Companies: The Nasdaq comprises over 3,000 listed companies, giving investors a wide choice of companies across a variety of industries.
- Focus on the technology sector: The Nasdaq is primarily known for its technology companies, which represent some of the most successful and innovative companies in the world.
- Growth Potential: Nasdaq-listed companies are often characterized by high growth and constant innovation, offering high growth potential.
- Liquidity: The Nasdaq is one of the most liquid financial markets in the world, which means investors can easily buy and sell stocks without liquidity concerns.
- Diversification: Investing in the Nasdaq allows investors to diversify their portfolio, thereby reducing overall risk.
Nasdaq member companies
There are over 3,500 stocks listed on Nasdaq, but not all of them are included in the Nasdaq Composite index, but "only" 101.
Because the index is weighted by market capitalization and because some of the largest companies in the world are listed on Nasdaq, the index is quite heavy. The top 10 stocks on the Nasdaq Composite account for approximately 50% of the index’s performance.
The 10 largest companies making up the Nasdaq index are:
- Microsoft Corp
- Apple Inc
- NVIDIA Corp
- Amazon.com Inc
- Tesla Inc
- Meta Platforms Inc
- Alphabet Inc
- Broadcom Inc
- PepsiCo Inc
- Costco Wholesale Corp
How to invest on the Nasdaq
The easiest way to invest in the Nasdaq Composite Index is to buy an index fund, which is a mutual fund or ETF that passively tracks the index. An index fund is designed to invest in all constituents of a stock index following the same index weightings. The idea is that, over time, index funds can offer virtually identical performance (after fees) as the index they track.
As anticipated, there are different ways of investing in Nasdaq, each with its advantages and disadvantages. Let’s see the main options available:
1. Buying individual shares on the Nasdaq
To invest in Nasdaq, you can buy individual shares of companies listed in the index. This strategy gives investors the ability to select companies they like and directly benefit from their success. However, buying individual stocks requires thorough research and accurate valuation of companies, as well as active investment portfolio management.
2. ETFs and Mutual Funds
Another option is to invest in the Nasdaq through ETF (Exchange Traded Fund) or mutual funds that track the performance of the index. These instruments offer diversification and ease of management, as they allow you to invest in a basket of stocks without having to select individual companies. Additionally, ETFs and mutual funds are often cheaper in terms of fees than buying individual shares.
3. Contracts for Difference (CFDs)
Contracts for Difference (CFD) offer a flexible way to invest in Nasdaq. These financial instruments allow investors to speculate both upwards and downwards on the performance of the index, without having to physically own the shares. In addition, CFDs allow you to use leverage, which allows you to amplify your potential profits. However, you should be aware of the risks associated with using leverage and trading complex instruments such as CFDs.
Conclusions
Investing in Nasdaq offers investors the opportunity to participate in the success of leading technology companies and to exploit potential growth opportunities. With a wide range of investment options, such as buying shares, using ETFs, investing through CFDs or accessing managed accounts, investors can find the strategy that best suits their needs and goals financially. However, it is important to be aware of the risks associated with investing in the stock market and to make informed decisions based on sound research and accurate valuation of Nasdaq-listed companies.
Original article published on Money.it Italy 2023-07-06 14:14:00. Original title: Come investire sul Nasdaq
