The NASDAQ 100: What It Is and How It's Calculated

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It's not uncommon for new investors to ask themselves, "What is NASDAQ 100, and should I get involved?" If you're a trader or an individual investor, you’ve probably heard of this index and considered making it a part of your own investment strategy. And for good reason – this index serves as a significant benchmark in the stock market world and plays a pivotal role in investment strategies.

However, understanding what it is and how it's calculated isn't always straightforward. In this article, we'll unravel the complexity of the NASDAQ 100, bringing clarity to its components and calculation method. By doing so, we aim to enhance your trading knowledge and empower you to make informed investment decisions.

What Is the NASDAQ 100?

The NASDAQ 100 is a stock market index that includes the 100 largest non-financial companies listed on the NASDAQ stock exchange, but the answer goes beyond a simple definition. More specifically, what does that mean for you as an investor?

First, let's make one thing clear: not all indices are created equal. The NASDAQ 100 stands out from others like the S&P 500 and Dow Jones because it specifically excludes financial companies, focusing instead on sectors such as technology, retail, and healthcare.

Additionally, the NASDAQ 100 is linked with the ticker QQQ. The Invesco exchange-traded fund (ETF) uses QQQ to track the NASDAQ 100 Index. You can learn more about ETFs and the NASDAQ 100 by reading "A Guide to NASDAQ 100 ETFs: From Dividends to Vanguard."

The Companies of the NASDAQ 100

As we've discussed, the NASDAQ 100 is composed of non-financial companies. These firms can range from giants of the tech industry to key players in biotechnology. It's this diversity that gives the NASDAQ 100 its unique appeal and character.

However, each company doesn't carry equal weight in the index. Influence in the NASDAQ 100 is determined by the company's size, or more specifically, its market capitalization. Larger companies – those with more outstanding shares multiplied by their share price – command a greater share of the index.

Therefore, the performance of these big companies can significantly sway the NASDAQ 100's overall performance.

How the NASDAQ 100 is Calculated

To answer this question, we need to delve into the concept of market capitalization. Here are three things to keep in mind:

1. Market capitalization is the total dollar value of a company's outstanding shares of stock. It's calculated by multiplying the company's share price by its total number of outstanding shares.
2. The NASDAQ 100 uses a market capitalization-weighted methodology. This means companies with a higher market cap have a larger influence on the index's performance.
3. To calculate the NASDAQ 100, the market cap of each company in the index is added together. Then, the index's value is derived by dividing the total market cap of all companies by a divisor. The divisor is a proprietary figure adjusted by NASDAQ to maintain index continuity when changes happen, like a company leaving the index or stock splits.

Understanding how this index is calculated demystifies the number you see ticking up and down during trading hours, and helps you make better-informed NASDAQ 100 investment decisions. It's not a random figure but a calculated representation of the market caps of major non-financial players on the NASDAQ.

Factors Influencing the NASDAQ 100

While understanding what the NASDAQ 100 is and how the NASDAQ 100 is calculated is crucial, traders also need to know about the factors influencing this index's performance. Let's take a look at a few:

• Performance of Other Indices: If the S&P 500 (SPY), Dow Jones (DIA), or Russell 2000 (IWM) are trending upward, they could potentially pull the NASDAQ 100 up with them.
• Technical Analysis: Knowledge of support and resistance levels, moving averages, and chart patterns can offer insights into potential future price movements.
• Federal Reserve Decisions: Changes to interest rates can impact the stock market, including the NASDAQ 100. Both the anticipation and the announcement of these decisions can trigger market volatility.
• Market Trends and Sentiment: Broader market trends and investor sentiment can affect the NASDAQ 100. For example, a general downward trend interspersed with small rallies could influence the index's trajectory.

Being aware of these factors allows for a well-rounded trading strategy, ensuring you are in sync with the market's pulse.

Learn More About How to Get Into NASDAQ 100 Trading

The complexity of trading and the unpredictability of the market underscores the need for robust trading tools, insightful market analysis, and solid educational resources.

Want to know more about whether NASDAQ 100 trading is for you? Dive into our more detailed content pieces: "How Automation is Revolutionizing Trading: In-depth Analysis" and "Exploring Successful Trading Models: Monthly vs Active." To learn more about how to boost your return by focusing on a select group of stocks, read "The Power of Concentrated Portfolios in Maximizing NASDAQ 100 Returns."

Are you ready to take the next step? Get started with our NASDAQ 100 All-Stars Trading Model and maximize your trading potential.