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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Nasdaq 100 Index

What it is:

The Nasdaq 100 index is one of the most frequently cited "technology" indexes.

How it works (Example):

The Nasdaq 100 Index is composed of the 100 largest stocks (based on market capitalization) traded on the Nasdaq. This index is computed using a modified market weighting. Although firms with the largest market caps tend to have the largest influence on the index, its value is modified to keep any issues from having an "overwhelming" effect on the index results. The actual computation methods are proprietary to the Nasdaq.

Because it tracks stocks traded on the Nasdaq exchange, it is often considered a technology barometer despite the fact that many health care, biotech and service issues trade there as well. Though it was introduced in 1985, the tracking fund was formally launched near the height of the Internet bubble in March of 1999. It has quickly become the most actively traded index on the market.

Why it Matters:

The Nasdaq 100 gives investors a quick snapshot of how some of the nation's largest technology firms are faring. It includes almost all of the country's top technology stocks, so it is a better proxy for this sector than most other indexes.

The Nasdaq 100 is heavily weighted toward technology stocks, making it difficult to use as a gauge for the overall market. This tech-heavy focus also makes the index extremely volatile compared to other indexes. Though the Nasdaq 100 will generally follow the same trend as other indexes (such as the S&P 500), it is not uncommon for it to be twice as volatile as others indexes on strong up or down days.

The NASDAQ 100 trades under many forms. Hedge funds, daytraders and personal investors often use the index as a means to speculate or hedge their portfolios. Because of its wide usage, the Nasdaq 100 is one of the most heavily traded indexes on the planet. Most investors are familiar with the wildly popular PowerShares QQQ Trust (formerly the Nasdaq-100 Trust). Its ticker symbol is QQQQ, and it is also commonly referred to as the "q's" or "cubes." QQQQ is an exchange-traded fund (ETF) that tracks the Nasdaq 100. This ETF is one of the most liquid issues on the Nasdaq, and with an expense ratio of 0.20%, it is probably the most efficient way to trade this index.