The NASDAQ-100 – What is it, how exactly does it work, and how can you apply it to Forex?

Let’s start with the basics. 

Founded in 1971 by the National Association of Security Dealers (NASD), NASDAQ began its life as an acronym for the National Association of Securities Dealers Automated Quotations. At the time of its creation, it was the first and only electronic market, though at the time it only provided quotations and did not facilitate trading. Gradually the market expanded to include trade and volume reporting as well as automatic trading. 

In addition to being the first electronic market, NASDAQ would eventually become the first market to trade online, which in turn attracted more and more large companies. This technological prowess is also partly credited with modernizing the IPO.

Today, the NASDAQ is the second-largest stock market in the world, trailing only the New York Stock Exchange in market capitalization. The market is also not limited to companies that have their headquarters in the United States, a distinction which sets it apart from several other US markets. It currently has a market cap in excess of $10 trillion. 

How Does it Work?

Pay attention, this might get a bit confusing. 

In order to calculate the composite index of the market, Nasdaq uses a market capitalization weighting method. Also known as a market-value-weighted index, this means that the market’s components are weighted according to the total market value of their shares. Since individual stock prices change daily, this, in turn, changes the stock index’s value. The index value is reported once per second with the day’s final value checking in at 4:16 pm each trading day. 

In the case of NASDAQ, the index’s value is calculated as such:

The total value of the share weights of each of the constituent securities xeach security’s last price.

This total is then divided by an index divisor which brings the number to an appropriate figure for reporting. 

Which Companies Are in the NASDAQ-100?

Technology makes up the largest segment of the market, coming in at roughly 46.40% of the market. Next, are consumer services which comprise 20.16% of the market. Health care is next at 10.86% followed by financials at 8.59%, industrials at 6.32%, consumer goods at 5.49%, oil and gas at 0.71%, telecommunications at 0.70%, basis materials at 0.47%, and utilities at 0.30%.

The Full list of companies and their component’s weight is down below this article.

Why the NASDAQ Matters for Forex Traders

You might have noticed in the title of this article that there are two components. While the overall market value is derived from the composite, the NASDAQ-100 is a selection of the top valued companies within the NASDAQ, ranked by market capitalization. 

While the index is comprised of NASDAQ listed companies, it excludes financials and is heavily weighted towards the tech sector (seen earlier in the breakdown of market share across industries). This weight towards tech leads many investors to look at the index as a proxy for the more volatile, speculative shares. Members of the list include Apple, Microsoft, and Alphabet (Google’s parent company).

Because a large part of the index is technology and therefore export-driven, with factories and warehouses overseas, the index is not typically relied upon to give a wholly accurate look at the US economy. Rather, the NASDAQ can be used to see a larger picture in which investors can gauge risk appetite. The market tends to come up short in times of economic uncertainty, playing the role of a reverse safe-haven for investors. 

Trading the NASDAQ-100 Index 

The NASDAQ Composite is a leading financial indicator. Where analysts tend to use the NASDAQ as a benchmark, others are likely to invest in it depending on which market you have access to. The NASDAQ-100 composite is available for investment by various financial vehicles. The CME, for example, offers the E-Mini NASDAQ NQ as a future contact, There are few financial agencies who have issued NASDAQ Composite ETF (Exchange-Traded Funds). The most simplistic way to trade a forward feed of the NASDAQ is by trading its CFD (contract for difference)variation, which is usually available with most retail forex brokers.