What Is the Nasdaq? How the Exchange Works

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The Nasdaq is a U.S. electronic stock exchange based in New York City. It opened on February 8, 1971, as the world’s first automated stock market, and it is known for listing many technology and growth-focused companies. The name originally stood for National Association of Securities Dealers Automated Quotations. “Nasdaq” also refers to three related things: the company that runs the exchange (Nasdaq Inc.), the Nasdaq Composite index, and the Nasdaq-100 index.

What the Nasdaq Is

At its core, the Nasdaq is a marketplace. Companies list their shares there, and investors’ orders, routed through brokers, are matched electronically. When you buy a share of a Nasdaq-listed company through a brokerage app, your order may be filled on the Nasdaq or on another U.S. trading venue, because listed stocks can trade across many venues. The listing exchange is where the company meets its listing requirements and where its official opening and closing prices are set.

The name was originally written in capitals, NASDAQ, because it was an acronym. The organization now styles itself “Nasdaq,” and both forms appear in financial writing. In stock quotes, a prefix such as “NASDAQ: AAPL” means the stock’s primary listing is on this exchange.

How the Nasdaq Works

From quotations to an exchange

The Nasdaq began as an electronic quotation system for over-the-counter stocks, created by the National Association of Securities Dealers (NASD), the predecessor of FINRA. Before it existed, dealers in unlisted shares had to phone one another to find prices. The NASD’s system displayed dealers’ bid and ask quotes on computer screens, which made prices visible and trading faster.

The Nasdaq was designed as an alternative to the specialist system, which had dominated U.S. exchanges for close to a century. In that model, a designated specialist on a physical floor managed trading in each stock. On the Nasdaq, competing market makers posted quotes electronically, and buyers and sellers traded against them. Over the following decades electronic trading became the standard model for exchanges worldwide, including those that once relied on floors.

How trading happens today

Trading on the modern Nasdaq runs through an electronic order book. Buy orders (bids) and sell orders (asks) are ranked by price and then by time, and the system matches them automatically. Market makers still play a role by posting quotes on both sides of the market, which helps keep a stock tradable when few natural buyers or sellers are present.

Regular trading runs from 9:30 a.m. to 4:00 p.m. Eastern time on business days, with pre-market and after-hours sessions outside those times. Extended sessions often have thinner trading, so spreads between bid and ask prices can be wider than during regular hours.

Listing tiers

The exchange lists more than 5,000 domestic and foreign companies, including Apple and Microsoft. A company that wants to list must meet financial, liquidity and governance standards, and the Nasdaq places listed companies in three tiers:

1. Nasdaq Global Select Market: the tier with the highest initial listing standards, home to many of the largest companies.
2. Nasdaq Global Market: a middle tier for established mid-sized companies.
3. Nasdaq Capital Market: a tier with lower thresholds, used by many smaller and early-stage companies.

The business behind the exchange

Nasdaq Inc. is much more than one U.S. stock market. It operates 18 markets for trading stocks, derivatives, fixed income and commodities across the U.S., Canada, the Nordic countries and the Baltics, along with a clearinghouse and four central securities depositories in the United States and Europe. Its trading technology is also used by more than 135 other marketplaces in over 50 countries.

The company earns fees from financial institutions, brokers, institutional investors and corporations in four broad areas:

• Market services: access to its trading venues.
• Investment intelligence: market data, indexes and analytics.
• Market technology: trading and settlement platforms and anti-financial-crime software.
• Corporate services: listing fees and investor relations services.

The Nasdaq Indexes

Nasdaq Composite

When a news report says “the Nasdaq rose 1%,” it usually means the Nasdaq Composite, an index of more than 3,370 stocks listed on the exchange. Its largest members include Nvidia, Apple, Microsoft, Alphabet, Meta Platforms, Amazon and Tesla. Because it is weighted by market capitalization, those giants move the index far more than its smaller members do.

Nasdaq-100

The Nasdaq-100 holds 100 of the largest U.S. and international non-financial companies listed on the Nasdaq, ranked by market capitalization. Alongside the big technology names, it includes companies such as Costco, Starbucks, Amgen and PepsiCo, so it is not purely a tech index. Banks and other financial firms are excluded by design. Investors gain exposure to it through mutual funds, ETFs, options, futures and annuities that track its performance.

Nasdaq-100 futures trade on the CME, a derivatives exchange, not on the Nasdaq stock market. A futures chart labeled “Nasdaq” is a contract on the index, not on the exchange or its shares.

Worked example: how a cap-weighted index moves

The calculation below is a hypothetical, simplified example with three made-up companies. Real index methodology adds adjustments, and the Nasdaq-100 uses a modified weighting that caps the largest members.

A market-cap-weighted index is calculated as:

Index level = (sum of members’ market capitalizations) ÷ divisor

Assume the divisor is 1 billion, and:

Total market cap is $64 billion, so the index level is 64,000,000,000 ÷ 1,000,000,000 = 64.

Now suppose Company A rises 10% to $110 and Company C falls 10% to $18, while B is unchanged. A’s market cap becomes $55 billion and C’s becomes $3.6 billion. The new total is $68.6 billion, and the index rises to 68.6, a gain of about 7.2%. Equal-sized percentage moves in opposite directions did not cancel out, because A carries far more weight. The divisor is adjusted when members join or leave so that those changes do not themselves move the index.

History and Milestones

• 1971: The Nasdaq opens on February 8 as a subsidiary of the NASD.
• 1980s to 1990s: Young technology companies list on the exchange, and the Composite becomes the most-quoted benchmark for the tech sector. Apple went public on the Nasdaq on December 12, 1980, at $22 a share.
• 1995 to 2002: The Composite rallies about 400% into March 2000, then falls about 78% by October 2002, making it the defining index of the dot-com boom and bust.
• 2006: The Nasdaq becomes a national securities exchange separate from the NASD.
• 2008: It merges with the Nordic exchange group OMX to form Nasdaq OMX Group, acquires the Philadelphia Stock Exchange and joins the S&P 500.
• 2015: The company renames itself Nasdaq Inc.
• 2016: Adena Friedman becomes CEO, the first woman to lead a major U.S. exchange.
• 2021: The SEC approves a Nasdaq rule on board diversity disclosure. A federal appeals court struck the rule down in December 2024.

Nasdaq vs. Related Terms

Nasdaq vs. NYSE. Both are U.S. stock exchanges in New York. The New York Stock Exchange keeps a physical trading floor with designated market makers, while the Nasdaq has always been fully electronic. Today both run on electronic systems, and both list companies from every sector.

Nasdaq Composite vs. S&P 500. The Composite includes nearly every eligible Nasdaq-listed stock, whatever the exchange’s sector mix. The S&P 500 selects 500 large U.S. companies from both major exchanges using committee rules, so it is more balanced across sectors.

Nasdaq vs. the Dow. The Dow Jones Industrial Average holds only 30 stocks and is price-weighted, so a higher-priced share moves it more regardless of company size. Both Nasdaq indexes are weighted by market value.

The exchange vs. NDAQ. Buying NDAQ shares means owning part of the exchange operator, a financial company whose earnings come from fees. It is not the same as investing in the Nasdaq Composite or the Nasdaq-100.

Limitations of the Nasdaq as a Gauge

• Concentration. Because of cap weighting, a handful of very large technology companies drive much of the Composite’s and the Nasdaq-100’s movement. A strong day for the index can hide weakness in most of its members.
• Sector tilt. Both indexes lean heavily toward technology and growth stocks, so they can swing more than broad-market benchmarks, as the 2000 to 2002 decline showed.
• Partial coverage. Only Nasdaq-listed stocks qualify. Large companies listed on the NYSE are left out regardless of size.
• Listing is not quality. Being listed on the Nasdaq, or placed in a higher tier, means a company met listing standards. It says nothing about valuation, which needs measures such as the P/E ratio.

FAQs

The Bottom Line

Investors who follow headlines about the Nasdaq or buy funds tied to its indexes need to know which Nasdaq is meant. The Composite and Nasdaq-100 are cap weighted and tilted toward technology, so a few giant companies drive their moves and swings can be sharp. Buying NDAQ shares means owning the exchange operator, and a Nasdaq listing says nothing about a stock's valuation.