How does the Nasdaq Composite Index work?
Like most major stock indexes, the Nasdaq Composite is weighted by the market capitalizations of its underlying components. This means that when larger companies' stocks move, it has a greater effect on the performance of the index than when the stocks of smaller companies move.
For example, a Nasdaq-listed common stock with a $100 billion market cap would have twice the influence on the index as a company with a $50 billion market cap, assuming an equal movement in both stocks' prices.
The level of the Nasdaq Composite Index fluctuates continuously during stock market trading hours.
How many companies are in the Nasdaq?
There are 2,667 Nasdaq-listed securities as of February 2020, but as mentioned previously, not every type of security is included in the Nasdaq Composite index. For example, the portion of the Nasdaq that consists of exchange-traded funds (ETFs) is not included.
According to the fact sheet for the Fidelity Nasdaq Composite Index Fund (NASDAQMUTFUND:FNCMX), a mutual fund that tracks the index, there were a total of 2,065 different stocks issued by 2,035 companies in the index as of the end of 2019. (Some companies have more than one class of stock.)
However, it’s important to know that because the index is weighted by market capitalization, and because some of the largest companies in the world are Nasdaq-listed, the index is rather top-heavy. In fact, the top 10 stocks in the Nasdaq Composite account for one-third of the index’s performance. With that in mind, here’s a look at the 10 largest stocks in the Nasdaq Composite:
- Microsoft (NASDAQ:MSFT)
- Apple (NASDAQ:AAPL)
- Amazon (NASDAQ:AMZN)
- Alphabet Class C (NASDAQ:GOOG)
- Alphabet Class A (NASDAQ:GOOGL)
- Facebook (NASDAQ:FB)
- Intel (NASDAQ:INTC)
- Netflix (NASDAQ:NFLX)
- PepsiCo (NASDAQ:PEP)
- Cisco Systems (NASDAQ:CSCO)
Data source: Nasdaq.com as of April 15, 2020.
How to invest in the Nasdaq Composite Index
The easiest way to invest in the Nasdaq Composite Index is to buy an index fund: a mutual fund or ETF that passively tracks the index. An index fund is designed to invest in all of the components of a stock index, in the same weights as they are given in the index itself. The idea is that over time, index funds will deliver virtually identical performance (net of fees) as the index they track.
For example, Fidelity offers two investment vehicles that track the Nasdaq Composite. On the mutual fund side, the Fidelity Nasdaq Composite Index fund (mentioned above) has a 0.30% expense ratio and no minimum investment. Fidelity also offers its Nasdaq Composite Index ETF (NASDAQ:ONEQ), which trades like any other stock and charges a lower expense ratio, at 0.21%. Like the mutual fund, there’s no minimum investment required, but it’s worth pointing out that the price of a single share is about $375 as of February 2020, so you’ll need to invest at least that much, or choose a broker that allows you to buy fractional shares of stock.
Nasdaq 100: The other Nasdaq stock index
There’s another Nasdaq-based index that is widely followed: the Nasdaq 100. This index, which is also market-cap weighted, is often confused with the Nasdaq Composite, but there's a big difference that's important to note.
Specifically, instead of including all of the common stocks listed on the Nasdaq exchange, the Nasdaq 100 only includes the stocks of the 100 largest non-financial companies listed there. The 100 companies in the Nasdaq 100 make up more than 90% of the weight of the Nasdaq Composite Index.
Just like with the Nasdaq Composite, there are mutual fund and ETF products that allow investors to track the Nasdaq 100 Index in their portfolio, most notably the Invesco QQQ (NASDAQ:QQQ) ETF, which invests proportionally in the 100 index components for a low expense ratio of 0.20%.