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INVESTOR EDUCATION
Nasdaq 100 Index


 

The NASDAQ-100 is a stock market index of 100 of the largest domestic and international non-financial companies listed on the NASDAQ stock exchange, it is a modified market value-weighted index; the companies weights in the index are based on their market capitalization, with certain rules capping the influence of the largest components. It does not contain financial companies, and includes companies incorporated outside the United States; both of these factors differentiate this index from the S&P 500 and the Dow Jones Industrial Average.

History

The NASDAQ-100 began on January 31, 1985 as a way for the Nasdaq Stock Market to support enhanced media coverage for itself. The index was introduced the same day as the NASDAQ Financial-100 Index and as a result, financial companies were, and still are, excluded from the NASDAQ-100. The base price of the index was initially set at 250, but when it closed near 800 on December 31, 1993, the base was reset at 125 the following trading day, leaving the halved NASDAQ-100 price below that of the more commonly known NASDAQ Composite.

The first annual adjustments were made in 1993 in advance of options on the index that would trade at the Chicago Board Options Exchange in 1994. Foreign companies were first admitted to the index in January 1998, but foreign companies had higher standards to meet before they could be added. Those standards were relaxed in 2002, while standards for domestic firms were raised, ensuring that all companies met the same standards.

The all-time highs for the index, set at the height of the dot-com bubble in 2000, stand above 4,700 points, while its recent bear market lows in 2002 occurred below the 900 point level. The NASDAQ-100 closed above the 2,200 point milestone on October 23, 2007 for the first time in over 80 months and reached an intraday high of 2,239.51 on October 31, 2007, the highest reached since February 16, 2001. However, the index has corrected below the 2,000 level in early 2008 amid high energy prices and recession fears. As of January 22, 2008, its close, nearly 20% below the recent highs (but 50 points above its intraday low), places the index on the brink of the common definition of a bear market.

Options and ETF

NASDAQ-100 is often abbreviated as NDX. Its corresponding futures contracts are traded on the Chicago Mercantile Exchange. The regular futures are denoted by the Reuters Instrument Code ND, and the smaller "e-mini" version uses the code NQ. Both are among the most heavily traded futures at the Chicago Mercantile Exchange.

The NASDAQ-100 Trust Series 1 Exchange-traded fund, sponsored and overseen since March 21, 2007 by Powershares, trades under the ticker NASDAQ: QQQQ. On December 1, 2004, it was moved from the American Stock Exchange where it had the symbol QQQ to the NASDAQ and given the new four letter code QQQQ.

It is sometimes referred to as the "Quad Qs," "Cubes," or simply as "the Qs." In 2000 it was the most actively traded security in the United States, but has since dropped to second place after Standard & Poor's Depository Receipts. On July 17, 2007, the ETF closed above $50 for the first time since early 2001.

Standards

The NASDAQ has over the years put in place a series of stringent standards for which companies must meet before being included in the index. Those standards include:

  • Being listed exculsively on NASDAQ in either the Global Select or Global Market tiers
  • Being listed for two years(or if it meets certain market capitalization standards, one year)
  • Having average daily volume of 200,000 shares
  • Being current in regards to quarterly and annual reports, and;
  • Not being in bankruptcy proceedings.

Additionally, companies with multiple classes of stock are only allowed to have one class included in the index (usually the largest class in terms of market capitalization).

Yearly Rebalancing

While the composition of the NASDAQ-100 changes in the case of delisting (such as transferring to another exchange, merging with another company, or declaring bankruptcy, and in a few cases, being delisted by NASDAQ for failing to meet listing requirements), the index is only rebalanced once a year, in December, when NASDAQ reviews its components and makes the appropriate adjustments. All changes, regardless of when it occurs, are publicly announced via press releases at least five business days before the change is scheduled to take place.

There are two tools the NASDAQ uses to determine the market values of companies for the annual review:

  • Share Prices as of the last trading day of October (usually the 31st unless the 31st falls on a weekend);
  • Publicly announced share totals as of the last trading day of November (usually the 30th unless it falls on a weekend).

Those components that are in the top 100 of all eligible companies at the annual review are retained in the index. Those ranked 101 to 125 are retained only if they were in the top 100 of the previous year's annual review. If they fail to move into the top 100 in the following year's review, they are dropped. Those not ranked in the top 125 are dropped regardless of the previous year's rank.

  • A company will also be dropped if, at the end of two consecutive months, the component fails to have an index weighting of at least one-tenth of a percent. This can occur at any time.

The companies that are dropped are replaced by those who have the largest market value and are not in the index already. Anticipation of these changes can lead to changes in the stock prices of the affected companies.

Differences from NASDAQ Composite Index

The NASDAQ-100 is frequently confused with the Nasdaq Composite Index; the latter index (often referred to simply as "the NASDAQ") includes the stock of every company that is listed on NASDAQ (more than 3,000 all together) and is quoted more frequently than the NASDAQ-100 in popular media.

The NASDAQ-100 is a modified capitalization-weighted average.

The methodology was created in 1998 in advance of the creation the NASDAQ-100 Index Trust, which holds portions of all NASDAQ-100 firms. The only time it is to be rebalanced again is if

  • One company is worth 24% of the index, or
  • Those companies with a weighting of at least 4.5% constitute 48% of the index.

Differences From Other Indices

In addition to its lack of financial companies, the Nasdaq-100 includes 13 companies incorporated outside the United States. The Dow Jones Industrial Average has never included foreign companies, and the S&P 500 also includes 13 non-U.S. companies (a coincidence - the 13 in each index are completely different).

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