NASDAQ-100 Index

The Nasdaq-100 index (NDX) is the world's largest electronic stock exchange.

The Nasdaq-100 index (NDX) is the world's largest electronic stock exchange. It comprises the 100 most significant American and foreign firms, defined by market capitalization, that are not in the financial sector and are listed on the Nasdaq.

NASDAQ-100 Index

The Nasdaq has been in print since January 31, 1985. Its baseline value was set at 250 points at the time. However, it was divided in 1994, thus reducing its baseline value.

A stock market index is a tool that allows investors to compare current and previous price levels to determine the market's overall performance.

Many industries are included in the NASDAQ-100 Index, including technology, retail, industrial, telecommunications, healthcare, transportation, and media. Microsoft Corp., Apple Inc., and Amazon.com Inc. are among the top technological businesses listed. The NDX is characterized as a technology index as a result of this.

When we look at the big picture, the NDX is a well-balanced mix of solid firms that is better positioned than the S&P 500 owing to the lack of sectors like oil and financials. In addition, the index's concentration on firms representing innovation and future growth is one of its distinguishing features. 

Since 2008, the NDX has outperformed other indices such as the S&P 500 Index and the Russell 1000 Growth Index.

History

The NASDAQ-100 Index was created in 1985 by the National Association of Securities Dealers (NASD) created NASDAQ Financial-100 Index, which focuses primarily on financial firms, which is why the NDX does not contain any financial companies.

Historical Texts

It produced two indices: the NASDAQ-100, which includes companies in the industrial, technology, retail, telecommunications, biotechnology, health care, transportation, media, and service sectors, and the NASDAQ Financial-100, which includes banking, insurance, brokerage, and mortgage lending enterprises.

The index's base price was initially set at 250, but after closing around 800 on December 31, 1993, it was reset to 125 the next trading day. This put the halved NASDAQ-100 price below that of the more widely recognized NASDAQ Composite.

In 1993, the first yearly modifications were made in anticipation of the index's options trading on the Chicago Board Options Exchange in 1994.

Foreign firms were allowed to the NASDAQ-100 for the first time in January 1998, although they had to achieve stricter requirements before being included. 

In 2002, those criteria were lowered, but domestic enterprises' standards were enhanced, ensuring that all businesses met the same standards.

Companies must fulfill Nasdaq's requirements to be included in the index. In addition to analyzing a company's market capitalization and liquidity, it demands that corporations be listed entirely on a Nasdaq exchange.

Nasdaq also has specific additional requirements, such as having a daily average volume of 200,000 shares and being listed on the exchange for at least three months. Initially limited to 100 corporations; however, it now includes 107 equity securities issued by 100 companies.

Importance of the NASDAQ- 100 index

The NASDAQ-100 Index is a capitalization-weighted index that has been changed. This means that equities are weighted based on their entire market value of outstanding shares-the value of a stock index changes in tandem with the price of a company's stock.

Importance

Surprisingly, the index is rarely rebalanced. Instead, when a rebalancing is needed, Nasdaq will assess the included firms, re-rank eligible companies, and make modifications.

Nasdaq will examine share prices and publicly report share totals if they decide to conduct an investigation. Companies placed 101st to 125th will only remain in the top 100 if they were in the top 100 the previous year. They will, however, be dropped if they cannot return to the top 100 that year. Likewise, they will be declined regardless of their ranking if it exceeds 125.

The NDX is significant because it has a substantial impact on both the local and global economies. Outside of the financial industry, it advises society and top company investors.

If they were to be included in the index, it would significantly impact their financial performance. The index is notable for featuring firms at the cutting edge of innovation across all industries. 

More broadly, Nasdaq offers a wide range of job possibilities.

How to buy the NDX

While there are various ways for investors of different levels to participate in the Nasdaq-100 (such as options, futures, and annuities), the exchange-traded fund path is one of the most straightforward.

Trade Screen

The Invesco QQQ Trust, Series 1 ETF (QQQ), which has been around for 20 years, is one of the oldest and most popular methods to invest in the Nasdaq-100. The Invesco QQQ ETF is the second most traded and liquid in the United States. With $76.96 billion in assets under management and a 0.20 percent cost ratio, it is the fifth-largest ETF.

Investors should remember that QQQ, like its underlying Index NDX, is cap-weighted, meaning that businesses with more significant market capitalization receive a higher weighting in the Index.

The First Trust Nasdaq-100 Equal Weighted Index Fund (QQEW), in contrast to QQQ, allows investors to own Nasdaq-100 companies equally weighted way. The NDXE, a similarly weighted replica of the Nasdaq-100, is its underlying Index. 

The highest allocation, or top holding, is at 1.68 percent. An equally weighted technique eliminates the risk of concentration and the influence of a single stock's sudden unfavorable price fluctuation. The ETF was founded in April 2006 and now manages $604.86 million in assets with a 0.6 percent cost ratio.

Apart from conventional ETFs, which replicate their underlying index one-to-one, there is a category of riskier ETFs known as leveraged and inverse ETFs, which track an index on a 2:1 or 3:1 ratio and in the opposite direction.

Eligibility to enter the NDX

Only certain types of securities are eligible for inclusion in the Index. Common equities, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests, and tracking stocks are all eligible for the Index.

The Index does not include closed-end funds, convertible debentures, exchange-traded funds, preferred stocks, rights, warrants, units, and other derivative securities.

Criteria

Checklist

Must be classed as an internet-related services provider, including but not limited to internet software, internet access providers, internet search engines, web hosting, website design, or internet retail commerce, as reasonably decided;

  • The Nasdaq Stock Market, the New York Stock Exchange, NYSE American, or the CBOE BZX Exchange are required to be listed
  • The market capitalization of at least $200 million
  • The daily average trading volume of 100,000 shares over the previous three months
  • $3.00 minimum closing price
  • There is a limit of one security per issuer.
  • The security's issuer must have "seasoned" on a recognized market (a firm is deemed seasoned if it has been listed for at least three months).
  • The security's issuer may not have engaged in a final agreement or arrangement that would make the security ineligible for the Index.
  • The deposit may not be issued by a company presently in bankruptcy.

Maintenance of the NDX

Corporate events such as stock dividends, stock splits, inevitable spin-offs, and rights issuances cause changes in the price and Index Shares, which are updated on the ex-date.

If the change in total shares outstanding due to other business activities is more significant than or equivalent to 10%, the adjustment is implemented as quickly as possible.

Maintenance

Otherwise, if the change in total shares outstanding is less than 10%, all such adjustments are collected and made at once every quarter following the end of trade on the third Friday of each month. The Index Shares are calculated using the total number of shares outstanding in the security.

The same percentage modifies the Index Shares as the total number of shares outstanding.

The Last Sale Price of an Index Security will be adjusted before the market opens on the ex-date for the extraordinary amount distributed if the listing exchange declares a special cash dividend. Extra, unique, non-recurring, one-time, uncommon, and other terms may describe a special dividend.

Usually, anytime there is a change in Index Shares, an Index Security, or the price of an Index Security owing to spin-offs, rights issuances, or special cash distributions, the divisor is updated to guarantee that the Index value is not disrupted. All adjustments are disclosed and incorporated into the Index before the market opens on the Index's effective date.

Rebalancing the Index

A modified market capitalization weighting mechanism is used in the Index. 

The Index is rebalanced every quarter to ensure that no Index Security's maximum weight exceeds 8% and that no more than five stocks are at that level. Any capped security's excess weight is divided proportionally among the other Index Securities. 

Balance

If any of the five highest-ranked Index Securities are weighted less than 8% after redistribution, they are not capped. 

Following that, any remaining Index Securities with a weight of more than 4% is capped at 4%, and the extra weight is divided proportionally among the remaining Index Securities. If required, the operation is repeated to obtain the final weights. 

After applying quarterly changes to the total shares outstanding, the modified market capitalization-weighting methodology is applied to the capitalization of each Index Security, using the security's Last Sale Price at the close of trading on the last trading day in February, May, August, and November. 

The modified market capitalization for each Index Security is then divided by its corresponding Last Sale Price. 

Index Shares are then calculated by multiplying the weight of the security derived above by the new market value of the Index and dividing the modified market capitalization for each Index Security by its corresponding Last Sale Price.

After trading on the third Friday in March, June, September, and December, the modifications take effect. Nasdaq will exercise reasonable discretion in administering the Index to maintain Index integrity.

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Researched and authored by Tanay Gehi | Linkedin

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