Nasdaq: What It Stands for, Crashes, Bubbles, Impact

How does Nasdaq affect you?

Close-up of NASDAQ sign in front of building
•••

Hulton Archive / Getty Images

The National Association of Securities Dealers Automated Quotation (Nasdaq) is one of the largest stock exchanges in the world. Over 3,000 listings on the exchange are used in the Nasdaq Composite, an equities index used by many stock analysts and investors to gauge the stock market's performance.

Learn more about Nasdaq, its history, and how it affects the U.S. economy.

Key Takeaways

  • Started in 1971 as the National Association of Securities Dealers Automated Quotation, the Nasdaq was the first electronic stock exchange; today, it lists many technology stocks like Apple, Meta (formerly Facebook), and Tesla.
  • The Nasdaq allows traders to exchange stocks, ETFs, derivatives, debt, and more.
  • As an equity index like the S&P 500 or the Dow Jones Industrial Average, the Nasdaq can be tracked by its performance to gauge the overall health of the stock market.

What Does Nasdaq Stand For?

Nasdaq is an acronym for the National Association of Securities Dealer Automated Quotation system. Founded in 1971, it introduced the world's first electronic stock market. The Nasdaq provides quotes for over-the-counter stocks not listed on other markets. As a result, it is commonly associated with technology stocks.

How Many Stocks Are in the Nasdaq?

The Nasdaq lists stocks of around 4,000 companies, including some of the most successful technology stocks: Apple, Microsoft, Alphabet (Google), Intel, Meta (formerly Facebook), Amgen, and Tesla.

It also offers trading in derivatives, debt, commodities, structured products, and exchange-traded funds (ETFs). 

Nasdaq vs. the Dow and S&P 500

The Nasdaq is an exchange, like the New York Stock Exchange (NYSE). However, unlike the NYSE, the Nasdaq reports the performance of all the companies that it lists. The Dow, the S&P 500, and the MSCI are indexes that track the performance of selected stocks.

These three indexes track U.S. stocks, so they tend to trend together, but they weigh stocks differently.

Dow

The Dow is the Dow Jones Industrial Average (DJIA). It follows the stock prices of 30 companies selected by the editors of the Wall Street Journal to represent their industries. They tend to be large, well-known companies, like Coca-Cola and Verizon.

The Dow weighs stocks with higher share prices more heavily than the Nasdaq does. That means that its performance will be swayed by companies that haven't split their shares and consequently have maintained higher stock prices.

Stock indexes are lists of stocks that indicate the performance of the selected stocks. Some indexes list all the stocks listed on an exchange, while others only list stocks picked by the index managers.

S&P 500

The S&P 500 tracks the 500 most widely held stocks on the NYSE. The S&P 500 is broader and gives a bigger representation of companies from various sectors and industry groups. The S&P 500 also uses market capitalization, but it only counts publicly available shares. A company with a lot of stock still held by a founding family member won't have as much influence on the index.

MSCI

The MSCI is the acronym for Morgan Stanley Capital International. It tracks stocks in global, frontier, and emerging markets. It also tracks other geographic sub-areas, such as the Gulf Cooperation Council and global small-cap, large-cap, and mid-cap stocks.

Nasdaq Highs and Lows

The Nasdaq Composite has continued climbing steadily since late 2014, setting new record highs consistently.

Nasdaq Crashes

On Aug. 22, 2013, Nasdaq shut down all trading from 12:14 p.m. ET to 3:25 p.m. ET. The "flash crash" was caused when one of the NYSE servers had trouble communicating with a server at Nasdaq. The server provided data about stock prices. Despite several attempts, the problem couldn't be resolved, and the stressed server at Nasdaq went down.

Note

Flash crashes are not the same as stock market crashes. They don't have the power to cause a recession and don't even last long enough to cause a market correction.

Nasdaq also had a problem with the initial public offering (IPO) for Meta (formerly Facebook), the second-largest in history. On May 18, 2012, trading on Facebook's initial stock offering was delayed for the first 30 minutes. Traders could not place, change, or cancel orders. After the glitch was corrected, an estimated $500 million was lost for traders. Nasdaq admitted that technical errors caused the delay.

Nasdaq Bubble

On March 10, 2000, the Nasdaq reached a pre-recession high of 5,048.62, caused by the irrational exuberance from investors anticipating continuous rising prices in tech. This created a bubble wherein the prices of any type of tech or internet stock rose high above reasonable valuations.

Important

The 2000 tech bubble was driven in part by the Y2K scare, when some feared that computer systems were going to crash as the date rolled over to the new millennia.

Most companies and many individuals bought new computer systems. They were afraid that old software might not be able to transition from dates that started with "19" to dates that started with "20." Many software systems also only recognized the last two digits of any year.

Computer and software manufacturers warned everyone to update their computer systems so they wouldn't fail at the stroke of midnight on Jan. 1, 2000. This caused sales to soar, making it seem that any tech-related company was sure to profit.

As it turned out, most computer systems were fine. Since everyone had just bought computers, demand was low; orders for tech-related products plummeted. The Nasdaq, heavy with tech stocks, dropped to 1,114.11 when it closed on Oct. 9, 2002.

How Nasdaq Affects the Economy

Nasdaq affects the economy in the three ways outlined below.

Benefit to Small Investors

Nasdaq allows small investors to own parts of successful technology companies. Without Nasdaq and the other stock exchanges, only large private equity investors and financial institutions could profit from America's free-market economy.

Markets Help Savers Beat Inflation

Investing in the stock market helps savers beat inflation over time. Stocks generally provide greater long-term returns than the average rate of inflation. However, they do carry a greater risk than savings accounts because you could lose your principal.

Markets Help Businesses Fund Growth

Stocks also provide the capital for companies to grow large enough to gain a competitive advantage through economies of scale. Expanding and successful businesses need capital to fund growth. The stock market is a key source of funding. To raise money through a public exchange, owners must sell part of the company. To do so, they "take the company public" through an IPO of the company's shares.

An IPO can raise a lot of cash. It also signals that a firm is successful enough to afford the expensive process of transitioning to a public company. The drawback for the company is that the founders no longer entirely own the company—the stockholders do. However, the founders can retain a controlling interest in the company if they own at least 51% of the shares.

Tip

Stocks indicate how valuable investors think a company is. When stock prices rise, investors believe that earnings will improve. Falling stock prices generally mean that investors have lost confidence in the company's ability to profit.

Stock prices rise in the expansion phase of the business cycle. Since the stock market can indicate investor and consumer confidence, a crash can devastate economic growth.

Lower stock prices mean less wealth for businesses, pension funds, and individual investors. As a result, companies can't obtain as much funding for operations and expansion.

Article Sources