What is the Nasdaq Composite Index?
How does the Nasdaq Composite Index work?
The Nasdaq Composite Index is comprised of virtually every firm that trades on the exchange. The index is calculated based on a market cap weighting, meaning that the largest firms have the greatest impact on the index's value. The top 10 stocks in the index account for greater than 30% of the Nasdaq Composite's value -- a truly remarkable statistic given that the index contains roughly 4,000 firms. Microsoft (NASDAQ: MSFT) alone comprises about 9% of the index.
Why does the Nasdaq Composite Index matter?
Though it is not as actively traded as its much smaller cousin, the Nasdaq 100, this index is more commonly referred to by investors and the financial press. When the question "How did the Nasdaq do today" is asked, the answer is usually the value of this index. Because technology firms account for roughly 2/3 of the index, investors often use the Nasdaq as a guide to help them determine the strength of technology stocks. However, because this index contains many unproven and speculative companies, it tends to be highly volatile relative to the other major indices. In addition, given that it represents such a small portion of the overall market, investors cannot use it to infer how the overall economy is faring.