Fathom the Ins and Outs of the Nasdaq

Physician's Money Digest, Nov30 2004, Volume 11, Issue 22

Many investors have a hard time explaining the difference between the Dow, Nasdaq, S&P 500, and other market indexes. Let's clarify the famous Nasdaq.

NASDAQ is the abbreviation for the National Association of Securities Dealers (NASD) Automated Quotation system. In recent years, this acronym has been changed into the proper noun "Nasdaq." Just to confuse us, the Nasdaq is also commonly called the over-the-counter (OTC) market. In my opinion, it would be more realistic to call it the over-the-wire or over-the-phone market, since everything is done electronically.

In 1971, the Nasdaq was created as the world's first electronic stock market. At its fundamental level, the Nasdaq is a computerized system that facilitates trading and provides price quotes for the most actively traded OTC stocks. The NASD established this computerized system to facilitate trading by providing brokers and dealers with current bid and ask price quotes on OTC stocks and some listed stocks.

Varying Platforms

Unlike the American Stock Exchange and New York Stock Exchange (NYSE), the Nasdaq does not have a physical trading floor that brings together buyers and sellers. Instead, all trading on the Nasdaq exchange is done over a network of computers and telephones. Also, unlike the NYSE, the Nasdaq does not employ market specialists to buy unfilled orders.

The Nasdaq began when brokers started informally trading over the telephone. The network was later formalized and linked by computer. Orders for stocks are sent out electronically on the Nasdaq, where Market Makers list their buy and sell prices. Once a price is agreed upon, the transaction is executed electronically. Market Makers are essential to the Nasdaq's operation, which is unlike the NYSE's auction market. Market Makers are NASD-member firms that use their own resources to represent certain stocks and compete with each other to buy and sell the stocks they represent, trying to post the best quotes and bids.

Far-reaching Market

Currently, the Nasdaq is the world's largest electronic stock market. Approximately 1.2 million users in 83 countries have access to the Nasdaq data network. It is traditionally the home to many high-tech stocks. In addition, the Nasdaq is known as the home for category-defining companies (eg, Microsoft, Intel, Cisco, and Dell). In fact, Dell made its stock debut here.

Unlike the Dow, the Nasdaq is a market value-weighted index (ie, each stock affects the index in proportion to its market value). Thus, in tracking companies, the Nasdaq takes into consideration each company's entire market capitalization (ie, the total value of all outstanding shares, calculated by multiplying the number of shares by the current market price) rather than simply the companies' share price. On average, the Nasdaq trades more shares per day than any other US market.

In 1996, Nasdaq Corporate launched Nasdaq.com, the stock market's public Web site. Nasdaq.com is a convenient tool for investors throughout the world. It offers comprehensive market information and tools, including company news, quotes, charting, analysis, and portfolio tracking. It's also a great place to find out additional information about the history of the Nasdaq. For additional information and to brush up your investing vocabulary, visit www.investorwords.com.

has a strong background

in ethical research and the investment industry.

She works full-time for the Valentine Capital

Retirement Planning Group of San Ramon,

Calif, and is the chief editor of their "High Net-

Worth Newsletter," published monthly. She is

currently working on her master's degree in

ethics. She welcomes questions or comments at

925-275-0200 or visit www.vcrpg.com. This

article was produced with contributions by

Valentine Capital Asset Management's

John Valentine, Mike Rowland, and Greg Costa,

and by John Gardner, president of Equity Research

& Portfolio Evaluation, Inc.

Genevieve Valentine