What it means
The index began in 1971 with a starting value of 100. It includes common stocks listed on the Nasdaq exchange, including those of companies based outside the United States, and it generally excludes other kinds of securities such as exchange-traded funds and preferred shares.
Like many major indexes it is weighted by market capitalisation, meaning the share price multiplied by shares in issue. The biggest companies therefore have the largest effect on the index.
A move of a few per cent in a handful of giant technology firms can swing the whole index, even if most smaller members barely change. Because of its composition, the index has become a shorthand for technology and growth sentiment.
When investors are optimistic about innovation and future profits, it tends to rise faster than broader indexes, and when interest rates rise or sentiment sours, it often falls further. It differs from the Nasdaq 100, which covers only the 100 largest non-financial companies.
The Composite includes financial firms and many smaller companies, making it broader but still dominated by its biggest members. Investors cannot buy the index directly, but they can buy funds designed to track it or use related derivatives.
For managers, it is a useful benchmark when judging how a growth-oriented investment is doing, or when explaining market conditions to a board. There are two practical cautions.
First, the index measures price changes only, so dividends are not included unless you look at a total return version. Second, because it is so concentrated at the top, its movements can say more about a few giant firms than about the typical listed company.
In practice
Real-world examples.
Example
A news presenter reports that the Nasdaq Composite fell 2% as investors worried about higher interest rates. A start-up founder planning a stock market listing watches the index to judge investor appetite for growth companies. If the index keeps falling, he may delay the filing.
Example
A financial planner compares a client's technology fund with the Composite to see if the fund manager added value. The fund returned 14% against 12% for the index, so it beat the benchmark. She also checks that the manager took similar risk, not just more of it.
Example
A university endowment's finance committee uses the Composite as part of a blended benchmark for its US growth equity allocation, alongside value and small-company indexes. The committee reviews the blend once a year and adjusts it if the portfolio's risk changes.
Formula
Calculation
Index level = Total market capitalisation of all member companies / Divisor
Percentage change = (Ending level - Starting level) / Starting level x 100
Suppose the index stands at 15,000 at the start of the year and finishes at 16,500. The change is (16,500 - 15,000) / 15,000 x 100 = 1,500 / 15,000 x 100 = 10%.
A $20,000 investment that tracked the index exactly would have grown to $20,000 x 1.10 = $22,000, before fees and taxes. If the index had fallen 10% instead, the same investment would have dropped to $20,000 x 0.90 = $18,000.Case study
Seen in the real world.
Quillon Systems is an illustrative, fictional software company preparing to list its shares. Its chief financial officer tracked the Nasdaq Composite closely, because a weak index usually meant investors would pay less for new growth shares.
After the index fell 15% over two months, the board postponed the listing by a quarter and used the time to improve its profit margin from 4% to 9%. When the index recovered, the company listed at a higher valuation than it could have achieved earlier.
In this illustrative story the delay cost some management time and a few advisory fees but improved the final outcome. The case shows how a market index can influence corporate timing decisions. The board now reviews market conditions at every quarterly meeting.
Watch out
Common mistakes.
- Assuming the Composite is the same as the Nasdaq 100, when it includes thousands of companies and not just the top 100 non-financial ones.
- Treating it as a measure of the whole US economy, when it is concentrated in technology and growth shares and ignores unlisted businesses.
- Thinking a rise in the index means all shares are rising, when a few large companies can drive most of the move.
Questions
People also ask.
How many companies are in the Composite?
It includes the large majority of common shares listed on the exchange, so the number changes as companies list and delist. Check the index provider's factsheet for the current count.
What was its starting value?
It started at 100 in 1971.
Can I invest in the index directly?
Not directly, but you can buy funds that aim to track it. Compare their fees and tracking accuracy before choosing one.
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