If you follow the stock markets even casually, you’re likely to be familiar with the terms ‘Nasdaq’ and ‘Nasdaq 100’. So what’s the difference between the two, and should you invest? Let’s take a look.
What’s the Nasdaq?
In a previous article, we looked at some of the most popular stock exchanges in the world and what makes each one unique. We established that the Nasdaq is an electronic marketplace for trading securities. It’s actually the second-largest overall stock exchange in the world.
But the Nasdaq does not just refer to the stock exchange. The term is also used to refer to the Nasdaq Composite Index, a stock market index that tracks the stock of more than the 3,000 companies currently listed on the Nasdaq exchange.
In fact, when you hear market commentators and analysts saying ‘the Nasdaq has lost or gained X number of points’, they are most likely referring to the Nasdaq Composite Index.
The Nasdaq Composite Index is one of the world’s major stock indexes alongside other popular ones such as the S&P 500, the Dow Jones Industrial Average and the UK’s FTSE 100.
What’s the Nasdaq 100?
The Nasdaq Composite Index is not the only index that tracks companies listed on the Nasdaq stock exchange (even though it’s the most influential one).
There’s a smaller and more exclusive index known as the Nasdaq 100. This particular index tracks the stock of 100 of the largest non-financial companies in market value trading on the Nasdaq exchange. The companies are from various industry groups including retail, computer software, media, pharmaceuticals and biotechnology (though most are in tech).
Companies may be removed or added to the Nasdaq 100 every year depending on their market cap.
How have they performed?
In recent times, both Nasdaq indexes have outperformed other indexes such as the S&P 500 and the Dow.
For example, between 2010 and 2020, the Nasdaq 100 and the Nasdaq rose by 561% and 439% respectively. In the same period, the S&P 500 rose by 310% and the Dow rose by 182%.
This is mainly attributable to the fact that both Nasdaq indexes lean heavily into tech and a few other industries such as consumer services and health care, which have all been high performers in recent times.
How can I invest in the Nasdaq and the Nasdaq 100?
There are several ways to invest in the two Nasdaq indexes. One is by purchasing individual stocks in the companies that make up the indexes. But as you’re probably already thinking, that would be both time consuming and expensive.
Luckily, there’s a more efficient way to go about it. It involves investing in an index fund or an exchange-traded fund (ETF) that tracks the two Nasdaq indexes. There are several of these in the UK and you can find and invest in them quite easily through a share dealing account.
Why invest in the Nasdaq?
There are a lot of good reasons to consider investing in the Nasdaq and the Nasdaq 100.
For one, by investing in a fund that tracks the Nasdaq, you are essentially diversifying your portfolio by buying stock in more than 3,000 companies (or 100 in the case of the Nasdaq 100).
This as opposed to picking just a handful of companies to invest in can help reduce the overall risk of your portfolio and prevent any potential wild swings. Note, however, that this doesn’t diminish all risk. So it’s still useful to do your homework well before you invest.
Another reason to consider investing in the Nasdaq is to get exposure to the technology sector of the market.
The Nasdaq indexes are where you’ll find most of the major tech companies in the world. This makes them ideal investment vehicles for investors with an interest in the tech industry. The Nasdaq indexes are a good indicator of how the tech industry is performing in general.
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Motley Fool UK 2021