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Investing in the Nasdaq: What to consider
The Nasdaq 100 index is composed of the 100 largest companies in the US, excluding the financial sector. The allocation of stocks within the index is proportionate to company size, therefore, some companies have more effect over the index. Since many of the largest companies operate within the tech sector, such as Apple and Google’s parent company Alphabet, it is sometimes considered a barometer of the industry’s overall health. This relationship works both ways, since sometimes a significant spike in a single company’s stock price could lift the Nasdaq price as a whole.
The Nasdaq index is a hybrid of sorts. On the one hand, it could be affected by events relating to the American economy, such as changes in legislation, interest rates, or a certain administration’s financial policies. On the other, it could also be affected by trends relating to a specific sector, or even a single company - such as the aforementioned example regarding the tech sector. Hence, when investing in the Nasdaq, it is important to pay attention to both sides of the equation. Events such as the Fed’s rate decision or the NFP report could affect it, alongside earnings reports released by major American companies.
Generally speaking, indices are considered more stable than individual stocks. Since their diversified components could hedge against risk, a significant change in one company’s stock price might affect the index as a whole - but in a relatively moderate way. From a trading standpoint, since the global financial crash of 2008, the Nasdaq Index has been steadily climbing, therefore, investing in the Nasdaq as part of a diversified portfolio could add more stability to it.
Who should include Nasdaq in their portfolios?
- Low-risk long-term investors: Apart from global events in which markets around the world collapsed, the Nasdaq graph has shown steady gains over time and could be a good option for long-term investment.
- Thematic investment in the tech sector: Since a large portion of the Nasdaq 100 is composed of tech stocks, it could present a good option for those who wish to invest in the sector as a whole.
- Hedging against single-stock fluctuations: Those who invest in individual stocks who relate to the index, could use the Nasdaq as a hedging tool.
- Believers in the American economy: The Nasdaq is often affected by the US government’s economic policies, and those who believe it is heading for increased growth should consider investing in the Nasdaq.
What drives Nasdaq’s price?
Like many financial assets, there are a variety of factors that influence Nasdaq prices. However, when focusing on short-term movements, it is possible to narrow the list. One factor that is easily noticeable is how the Nasdaq relates to other indices in the US. The Nasdaq is often mentioned alongside Dow Jones and S&P 500. From a broader standpoint, since all three can serve as measures for the overall health of the American economy, it is not uncommon to see all three move in the same direction when there’s a positive trend in the US market. However, this factor could contradict the next factor, which relates to the Nasdaq’s composition.
Since the Nasdaq is composed of individual companies, it is possible for it to move in the opposite direction of the other two indices in certain instances. A good example would be earnings reports: If the markets are moving in a downward trend, but at the same time, a significant company, such as Facebook, releases an impressive earnings report, its stock could go up, lifting the index as a whole.
The Nasdaq index: An investment alternative
Another important aspect of the Nasdaq 100 index is how it relates to other investment mechanisms. The Federal Reserve sets the interest rates in the US, affecting the US Dollar, bank rates, and other financial instruments. Since the stock market in general, and index-based ETFs in particular, serve as investment tools - they often move up when interest rates are lower. Long-term investors will often opt to low-risk low-yield options as a means of making a profit over time. If interest rates are low, bank savings could lose their appeal, while other options become more alluring for investors. Therefore, if the Fed lowers interest rates, it is quite possible that many investors will opt to invest in the Nasdaq 100 index, as it could have the potential to show more gains over time, while offering the perceived stability of an ETF.
History of the Nasdaq
The Nasdaq 100 index was introduced in 1985 by Nasdaq, the world’s second-largest stock exchange (after the New York Stock Exchange). It was created alongside the Nasdaq composite index in an attempt to give investors more segmented exposure to the American market. Over the years, it has seen ups and downs, usually reverting to losses after a major global event, such as the 9/11 attacks in the US and subsequent war in Afghanistan, or the 2008 market crash. Despite its overall graph having significant differences between high and low points, since 2008, it has shown steady gains, mostly fueled by the booming tech sector in the US.
Conclusion: Be cautiously optimistic about the Nasdaq 100
With solid gains in recent years and it leaning on the ever-growing tech sector, the Nasdaq 100 is considered a good investment option by many traders. However, it is important to remember that it has been dragged down in the past by global events, such as the 2008 crash. That being said, the Nasdaq 100 leans on the tech sector and the US economy that has been growing to unprecedented levels in recent years. It is safe to assume that the Nasdaq 100 index will continue to present a popular investment option in coming years.