Stock Market Bubble? Here's How to End Up a Winner
If you're afraid of a pop, it's best to be prepared.
Many investors know the Nasdaq as a tech-heavy stock index. However, it although the latter is often the least understood of the major indexes in terms of composition and how it works.
The Nasdaq Composite is a stock market index that consists of the stocks that are listed on the Nasdaq stock exchange. To be included in the index, a stock must be listed exclusively on the Nasdaq market, and must be a common stock of an individual company -- so preferred stocks, exchange-traded funds (ETFs), and other types of securities are excluded.
The Nasdaq Composite is one of the most widely followed stock indexes in the U.S. and is usually one of the three “headline” indexes that market commentators often cite, along with the Dow Jones Industrial Average and the S&P 500.
Because the Nasdaq has a high concentration of companies in the technology sector -- particularly of the younger, fast-growing variety -- the Nasdaq Composite Index is often considered to be a good barometer of how well the tech market is performing.
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.
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:
Data source: Nasdaq.com as of April 15, 2020.
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.
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%.
Investing in stock market indexes is a great idea if you don’t have the time or desire to research and select individual stocks to invest in, or if you lack the knowledge necessary to properly evaluate stocks.
In fact, billionaire investor Warren Buffett, who is widely considered to be the best stock investor of all time, has said that index funds are the best investment choice for the majority of Americans. If you do have the time and desire to invest in individual stocks properly, we encourage you to do so, but if you don’t, there’s nothing wrong with putting your investment portfolio on autopilot with index funds.
With that in mind, the Nasdaq Composite Index offers lots of exposure to today’s tech heavyweights like Apple, Microsoft, and Amazon, while also giving investors some exposure to the tech heavyweights of tomorrow, thanks to its inclusion of every Nasdaq-listed common stock. As a result, the Nasdaq Composite Index could be a great investment choice if you don’t yet feel comfortable choosing individual stocks, or if you want broad exposure to the technology sector.
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