How To Invest In The Nasdaq (2024)

The US-based Nasdaq – National Association of Securities Dealers Automated Quotations – stock exchange was launched in 1971.

In 2023, with a market capitalisation of around $24 trillion, it is the world’s second-largest stock market behind the New York Stock Exchange (NYSE). Nasdaq offers investors a platform to trade thousands of US companies, including global titans such as Microsoft, Apple and Tesla.

Here’s a look at how the Nasdaq works, how it has performed, and ways for retail investors to gain exposure to it.

What is the Nasdaq?

The Nasdaq is an exchange where investors can buy and sell around 3,700 stocks and shares.

At launch, it offered a new way for investors to trade using automation and without doing so in-person on a physical exchange floor – the most common means of executing share trades at the time.

Today, all-electronic trading is commonplace and anyone – from professional investor to enthusiastic amateur – can manage a share portfolio from a trading platform on his or her smartphone.

According to Nasdaq, over four billion shares were traded on the exchange on a daily basis in February this year.

The exchange is open for trading between 9.30am and 4pm Eastern Time Monday to Friday. The exchange also offers both pre-market and after-hours extended trading – from 4am till 9.30am and 4pm till 8pm respectively.

Nasdaq itself is a publicly-owned company, trading its shares on its own exchange under the market ticker symbol NDAQ.

Which companies make up the Nasdaq?

Tertius Bonnin, assistant portfolio manager at EQ Investors, says: “Over several years, the Nasdaq has become the stock exchange of choice for companies in the information technology and biotechnology sectors, propelling the exchange’s reputation as a powerhouse of growth companies.”

The Nasdaq’s constituent companies tend to be skewed towards tech-orientated businesses traditionally making it a bellwether for the wider technology sector. Investment experts say it’s wrong, however, to think of the Nasdaq as being a ‘tech-only’ exchange.

Ben Yearsley, investment director at Shore Financial Planning, describes this as a myth worth dispelling: “It just happens that many of the biggest companies are in information technology. In fact, tech stocks only account for half, though there is a quirk here in that the second biggest sector, consumer discretionary, also includes stocks that many think of as technology, including Netflix and Tesla.”

Nasdaq Composite and Nasdaq 100

Given its overall size and the companies that participate on the exchange, the Nasdaq often appears in the financial news headlines.

But when the media refers to the Nasdaq, outlets are usually referring to one of two related stock indices, instead of the exchange itself: the Nasdaq Composite Index and the Nasdaq 100.

The former comprises around 3,000 common stocks listed on the exchange, while the latter tracks 100 of the largest and most actively traded securities .

The Nasdaq Composite and the Nasdaq 100 both use the same modified market capitalisation weighting method in which the closing price of each stock is multiplied by the total number of shares to arrive at its market capitalisation.

Share weights are worked out by dividing each security’s market cap by the total capitalisation of all the index’s securities. Share weights for each company are then multiplied by that stock’s closing price and the total divided by an index divisor that accounts for market fluctuations such as stock splits, mergers, etc.

The result is the day’s Nasdaq average.

Performance of the Nasdaq indices

Last year, 2023, was a surprisingly strong year for the US stock market in general, despite widespread concerns for a continuation of the 2022 bear market and looming recessionary fears (read more about that below).

In fact, the Nasdaq 100 had its best annual performance (up 55%) since 1999. This compared with a return of 26% for the broader-based S&P 500 and a more modest 16% for the 30 stock Dow Jones Industrial Average of heavyweight companies.

To put this in perspective, the UK’s FTSE 100 of leading company shares returned 3.8% over the same period, while the FTSE 250 was up 4.4%.

What happened in 2022?

Thanks to a co*cktail of economic conditions, including soaring inflation levels, rising interest rates, and the war in Ukraine, 2022 was challenging for stocks and shares investors of all kinds. For those with exposure to the Nasdaq, it was a horror show.

On the final trading day of 2022, the Nasdaq Composite ended the year down an eye watering 33.1%. This compared with a decline of about 19% for the S&P 500 index of 500 companies listed in US exchanges.

The Composite was particularly badly hit because the factors mentioned above stoked fears of recession – tech companies historically perform poorly during economic downturns as investors seek out more stable investments.

The strengthening of the US dollar also played a role in the Nasdaq’s demise in 2022 as US multinationals received less money from their international operations.

Prior to 2022, however, Nasdaq stocks had historically outperformed the S&P 500. For example, in the five years to July 2022, the S&P 500 rose about 60%. An impressive enough return over the period until you remember that the Nasdaq Composite increased by around 88% over the same time, while the Nasdaq 100 soared by 113%.

In these instances, the fact that both Nasdaq indices were tilted to tech and services contributed as much to the eye-catching performances of previous years as it did to when they faltered in 2022.

Shore Financial Planning’s Ben Yearsley says: “The Nasdaq took a pummelling in 2022. In effect, there weren’t any oil stocks or similar to protect investors as there were with, say, the FTSE 100.

How to invest in the Nasdaq

A popular and effective way to invest in the Nasdaq is via either an exchange-traded fund (ETF) or an index tracker fund.

These are ‘passive’ investments which rely on computer algorithms to replicate a particular index.

According to Rob Burgeman, senior investment manager at wealth manager RBC Brewin Dolphin, investors looking to gain a foothold in the Nasdaq should consider ETFs. “They are the simplest way for investors to get exposure. Think of them as cheap, cheerful, and doing what they say on the tin.

“For example, the Invesco EQQQ Nasdaq 100 UCITS ETF charges 0.3% and fully replicates the Nasdaq 100 Index.”

In this example, a £1,000 investment would therefore cost £3 although, depending on how/where the fund was bought – via an investment trading platform, for example – there may be additional dealing costs to factor in as well.

The charges levied by an ‘active’ fund – one relying on human judgment for stock selection – can be 10 times higher than for a passive alternative.

Ben Yearsley suggests participation in the Nasdaq via the iShares Nasdaq 100 or L&G Global Technology Index funds.

The former is an ETF that offers targeted exposure to 100 of the largest non-financial companies listed on the Nasdaq.

The latter is an index fund designed to track the performance of the FTSE World Technology Index (rather than the Nasdaq). But with a top 10 of holdings that includs Apple, Microsoft, Alphabet (Google’s parent company) and the tech company Nvidia, there is plenty of crossover with Nasdaq-listed companies.

Frequently Asked Questions

What is the UK equivalent of the Nasdaq?

For the reasons outlined above, the Nasdaq is one of the world’s leading exchanges featuring some of the globe’s leviathan technology companies. As such, there isn’t really a comparable UK equivalent. The FTSE All-Share Technology Indices from the index provider FTSE Russell probably comes closest inasmuch as they represent the performance of large, medium and smaller companies from the technology sector.

Which stocks are listed on the Nasdaq?

A full list can be found via the Nasdaq stock screener. Some of the most famous names include Apple, Alphabet, Amazon, Microsoft and NVIDIA.

Apple share price

How much should an investor hold in the Nasdq?

This is a subjective question. The answer will depend on numerous considerations, including, an individual investor’s financial goals and investing time-frame, along with risk appetite and overseas asset allocation requirements. A UK investor whose holdings are in pounds sterling but looking to gain exposure to the dollar-denominated Nasdaq also needs to factor in currency risk when conversions back into the base currency are made.

Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

What’s the S&P 500?

As with the Nasdaq, the is another influential stock index from the US. As the name suggests, it is made up of around 500 US companies and is a widely-used barometer of the overall health of corporate America.