An introduction to NASDAQ 100

The NASDAQ 100 is a stock index that represents the performance of 101 of the largest non-financial companies listed on the Nasdaq Stock Market, one of the major stock exchanges in the United States. This index is used to gauge the overall performance of various industries, including the technology and biotechnology sectors, and it excludes financial companies.

The Nasdaq is one of the major stock exchanges in the United States, alongside the New York Stock Exchange (NYSE). It plays a pivotal role in the U.S. financial markets. Nasdaq is recognised for listing a substantial number of high-tech and information technology (IT) companies. Furthermore, it holds the distinction of being the largest stock market globally for new venture companies, showcasing its significance as a platform for emerging businesses and initial public offerings (IPOs).

There are about 3,000 listed companies on the Nasdaq. Through the NASDAQ 100, which consists of the top 101 companies by capitalisation, it is possible to further determine the trend of the high-tech and IT sectors.

In February 2004, the NASDAQ 100 index stood at approximately 1,500 points. Fast forward to February 7, 2023, and it had surged to 12,500 points, marking an impressive nearly eight-fold increase over the span of 19 years. This remarkable growth trajectory, coupled with its demonstrated potential for sustained expansion over the long term, has positioned the NASDAQ 100 as an attractive target for prospective investments.

This article will explain the NASDAQ 100, its outlook, and how to use it.

The NASDAQ 100, a leading stock index, comprises the foremost 101 stocks based on market capitalisation, intentionally excluding the financial sector. This selection process is conducted from a pool of approximately 3,000 stocks listed on various Nasdaq exchanges, establishing the NASDAQ 100 as a representative benchmark of high-performing companies across diverse industries, with a deliberate focus on excluding financial entities.

What is a stock index?

A stock index tracks the prices of stocks across an entire exchange or a specific stock category. By examining the historical data of the index, you can gauge the fluctuation in stock prices and the movement and performance of a portfolio of holdings..

The inception of the NASDAQ 100 dates back to 1985, with constituent stocks meticulously chosen from various sectors such as technology, health care, consumer goods, and services. Iconic companies like Apple, Microsoft, and Alphabet (operated by Google) exemplify the caliber of stocks included in this index. The selection process employs a capitalisation-weighted average methodology.

Unlike the comprehensive Nasdaq Composite Index, which includes all stocks listed on Nasdaq, the NASDAQ 100 stands out due to its deliberate exclusion of the financial sector. Restrained to the top 101 stocks strategically weighted by market capitalisation, it provides a more accurate representation of high-tech stocks.

This specificity makes the NASDAQ 100 a particularly valuable instrument for traders seeking insights into the performance of leading companies in technology and related sectors. Now, let's delve into the constituent stocks that comprise the NASDAQ 100.

The NASDAQ 100 comprises the foremost 101 stocks within the NASDAQ market, strategically weighted by market capitalisation and excluding the financial sector.

Here are the top ten stocks in the NASDAQ 100.

Reference: Slickcharts (Components of the NASDAQ 100)

Data from January 2, 2024

The following companies were excluded/added during the stock reweighting in December 2022.

Reference: ANNUAL CHANGES TO THE NASDAQ-100 INDEX

The next section looks at the calculation method of the NASDAQ 100.

The NASDAQ 100 is calculated as a capitalisation-weighted average.

What is the capitalisation-weighted average?

The capitalisation-weighted average is a metric calculated by summing the market capitalisation of individual stocks and dividing this total by the overall capitalisation at the registration date. This approach enables an assessment of the capitalisation growth rate over a defined period, facilitating an estimation of the evolution of collective stock market value from historical data to the present. Essentially, it provides a nuanced and comprehensive measure that reflects the relative significance of each stock in the overall market capitalisation calculation.

In addition to the NASDAQ 100, stock indices such as the Nasdaq Composite Index, the S&P 500, and Japan's TOPIX also use the capitalisation-weighted average.

To summarise the NASDAQ 100:

1. The constituent stocks of the NASDAQ 100 are the top 101 stocks listed in Nasdaq by capitalisation
2. Typical stocks are Apple, Microsoft, and other tech companies
3. It is calculated by capitalisation-weighted average
4. With the capitalisation-weighted average, you can estimate the growth rate of capitalisation from the past to the present
5. The NASDAQ 100 is a better indicator of what is going on in the high-tech sector than the Nasdaq Composite Index

Here's a look at how the NASDAQ 100 has moved in the past.

The following chart tracks the NASDAQ 100 over the last 20 years (2003–2023).

2008: Lehman Brothers Collapse

While the 2007 subprime crisis was still ongoing, the large American investment bank Lehman Brothers filed for bankruptcy in 2008. The entity’s collapse caused the global financial crisis. The NASDAQ 100 traded at 2,000 in May 2008 but fell below 1,200 in November.

2020: COVID-19

The global outbreak of COVID-19 began in December 2019. The inevitable imposition of traffic restrictions and lockdowns worldwide has led to a sluggish global economy.

The NASDAQ 100 was still at 9,000 in early February 2020, but temporarily dropped to 6,800 in March 2020.

2022: The Russia-Ukraine crisis

In February 2022, the conflict between Russia and Ukraine caused chaos in global supply chains and severe inflation globally.

The US Federal Reserve Board (FRB) started a series of tightening measures (interest rate hike) to control domestic inflation. The NASDAQ 100 was impacted by the new course of action. While it stood at 16,000 in January 2022, it fell to around 11,000 in June 2022.

After the Lehman Brothers collapse and the COVID-19 crisis, it reached 16,700 in 2021, recording the highest price in its history.

Despite the Russian-Ukrainian war in 2022, the market managed to correct, ending at around 11,000.

The next section looks at other stock indices to help predict the NASDAQ 100 market.

In addition to the NASDAQ 100, the following are three key stock indices in the United States.

1. Dow Jones
2. S&P 500
3. Russell Index

Let's compare the differences between the NASDAQ 100 and other stock indices.

NASDAQ 100 versus Dow Jones

The Dow Jones Industrial Average (DJIA), or simply ‘the Dow’, is a stock market index of 30 prominent companies listed on stock exchanges in the United States, calculated and published by S&P Dow Jones Indices. It selected 30 of the most-traded stocks from the New York Stock Exchange (NYSE) and the NASDAQ. The stocks that pass the rigorous examination are considered outstanding, also known as "blue chip companies".Here are the differences between the NASDAQ 100 and the Dow Jones:

Next, let’s compare the performance of the NASDAQ 100 with that of the Dow Jones.

The above graph compares the growth rate over 20 years as of March 200.

NASDAQ 100 versus S&P 500

It selects 500 leading publicly traded stocks from companies listed on the New York Stock Exchange (NYSE) and the NASDAQ. It covers about 80% of the capitalisation of the US stock market. As the benchmark of the US stock market, it is followed by many investors.

Here are the differences between the NASDAQ 100 and the S&P 500:

Next, let’s compare the performance of the NASDAQ 100 with that of the S&P 500.

The graph above compares the growth rate over 20 years as from March 2003.

NASDAQ 100 versus Russell 2000

The Russell 2000 is a stock index calculated and published by Russell Investments. By capitalisation, it selects 2,000 stocks listed on the NYSE and NASDAQ. Comprising small-cap stocks, it is more sensitive to economic trends than the NASDAQ 100, the S&P 500, and the Dow Jones. Also known as the "leading indicator of the collapse", it is a stock index many investors watch.

Here are the differences between the NASDAQ 100 and the Russell 2000:

Next, let’s compare the performance of the NASDAQ 100 with that of the Russell 2000.

The graph above compares the growth rate over 20 years as from March 2003.

NASDAQ 100 is an index representing the performance of certain stocks, and traders typically trade financial products derived from it rather than the index itself. Common methods for trading the NASDAQ 100 include Exchange-Traded Funds (ETFs) and Contracts for Difference (CFDs). ETFs allow investors to buy shares of a fund that tracks the performance of the NASDAQ 100, while CFDs are financial derivatives that enable traders to speculate on price movements without owning the underlying assets.

Exchange-traded funds (ETFs) are suitable for long-term investment due to their relatively high commissions. Contracts for Difference (CFDs) are better suited to those who prefer short-term trading.

CFD trading

CFDs can be traded via either long or short positions on underlying assets such as stock indices, forex, precious metals, raw materials, and other products with margin without holding the assets. There are four key advantages to trading CFDs on the NASDAQ 100.

1. Leverage is available for trading
2. Most products can be traded 24 hours a day (may vary depending on the stock)
3. You can buy/sell CFDs in real-time
4. CFDs can be a risk hedge for investment trusts and ETFs

While individual stocks exhibit diverse characteristics, CFD trading offers the advantage of 24-hour availability, making it accessible even for those with hectic schedules. The use of highly leveraged CFDs allows traders to operate with a relatively small amount of funds, providing a more efficient alternative to ETFs. It's important to note, however, that the heightened leverage also introduces the risk of substantial losses. Given the inherent uncertainty in predicting future price movements, diligent risk monitoring becomes imperative in navigating the market dynamics associated with CFD trading.

Now let's examine the disadvantages.

There are four disadvantages to trading in the NASDAQ 100 through CFDs.

1. You will not receive dividends
2. You will pay funding charges (overnight interest)
3. There will be a spread
4. There is risk of margin close-out (mandatory liquidation) when certain losses occur

CFD trading involves funding charges. Also known as ‘overnight interest’ or swaps, traders will pay interest if they hold a position from one day to the next. In the case of holding long positions, the accumulated funding charges may result in lower returns. Also, CFD trading excludes dividend receipts, unlike traditional stock ownership. There is also a spread involved, the difference between buying and selling prices, impacting overall trade profitability. There's also a risk of mandatory liquidation when losses trigger a predetermined level, underscoring the need for vigilant risk management.

To start trading CFDs on the NASDAQ 100 Index, choose OANDA.