Index funds outperform NASDAQ
How can you invest on the Nasdaq?
At You can use the Nasdaq in an easy way both Invest in the general market (via an index) as well as in individual stocks. All you have to do is choose the financial instrument that best suits your needs and open an account with a broker.
Nasdaq is the name of the financial market, most commonly associated with technology, why, what are the benefits? And above all: how can you invest in this market?
We'll talk about that next.
What is the Nasdaq?
The term Nasdaq is an acronym. It stands for National Association of Securities Dealers Automated Quotation. It's a marketplace, an exchange. The largest in the United States after the NYSE (New York Stock Exchange).
The market also has its own representative indices, also called the Nasdaq (more on that in a moment).
When we so wondering how to get on nasdaq invested, we can refer to how to invest in the stocks of this exchange (Nasdaq Stock Market) or any of its indices. Index investing can be understood as “investing in the Nasdaq market in general” (the index is a weighted average of the major stocks and is used to measure the overall performance of the market).
It is worth mentioning that the Nasdaq Stock Market does not have a physical facility (like the floor of the New York Stock Exchange), but relies on a telecommunications network.
It are peopletrading stocks among themselves. They are known as market makers. They use this network to publish their prices (both buying and selling prices); at the same time you can use the published Prices from other market makers see and place buy and sell orders.
Price changes are displayed on a large screen in 4 Times Square, New York.
A Brief History of the Nasdaq for Better Understanding
The birth of the Nasdaq as a stock market took place when the Securities Exchange Commission (SEC), the Securities and Exchange Commission in the United States, in the 1960s asked the National Association of Securities Dealers (NASD), the OTC market (Over The Counter) to regulate.
Before the Nasdaq saw the light of day, company shares could be bought and sold in the United States in three ways:
- On the New York Stock Exchange (NYSE).
- On the American Stock Exchange (AMEX).
- Over the counter (OTC; “over the counter”: contracts between two parties, outside the official market).
Buying and selling OTC stocks is not illegal, but also does not guarantee security, transparency, liquidity, etc. For this reason, the SEC has called for better organization.
As already mentioned, this led to the automation of the market (by NASD), and so in 1971 NASDAQ was founded.
There was one thing he didn't like: It was still an over-the-counter market and thus secondary. The companies that were listed there started this way because they did not have access to a “real trading floor”. In other words, their goal was to enter the AMEX market, and to top it off, they entered the NYSE (the largest exchange).
To at to be listed on the stock exchange, companies have to meet a number of requirements. However, the NYSE's terms and conditions are very strict and make it difficult for young companies to go public.
So many companies began to be listed on this new market. These were mostly technology companies, and for this reason the Nasdaq has always been identified with technology. Complete e-commerce also played an important role in attracting companies from this area.
But the National Association of Securities Dealers Automated Quotation (NASDAQ) didn't want to be a “second rate” market. That is why it developed its own set of rules for listing in 1975 and separated the shares of the more powerful companies from the OTC. In 1982 the most powerful Nasdaq companies split up to form the Nasdaq National Market.
Finally, in 1991, the stock exchange regulators recognized shares in Nasdaq companies as equivalent to shares listed on the AMEX or NYSE.
Currently, this market is operated by the Nasdaq Stock Market Company (later privatized). It is also the market par excellence in which technology companies (electronics, biotechnology, telecommunications, IT) are listed. Companies such as Microsoft and Intel are listed on this exchange.
Also, its popularity came with the big internet bubble in the 1990s.
How do we know how a particular stock market is changing?
We should look at all of the companies listed there, analyze them individually, and identify the movements that they have experienced individually. In this way we get an idea of whether the market is changing in general bullish or bearish has behaved.
But it is an easier way: Take a set of the most representative stocks and use the average (weighted, in most cases) price of those stocks to check their performance. That's what a stock market index is.
As we mentioned earlier, index investing is like investing in the market as a whole. In this case, investing in the Nasdaq index is like investing in a basket of stocks made up of a number of the most representative Nasdaq companies: You follow the development of the overall market.
The Nasdaq indices are as follows:
- Nasdaq 100: The Nasdaq 100 Index was founded on January 31, 1985 and is made up of the 100 largest technology companies listed on the Nasdaq Stock Exchange (actually 103 since 3 of the companies that make up it issue two types of shares). It does not include shares in any financial company (or investment firm); because of this, the Nasdaq 100 is a good reflection of the technology sector. Both US and foreign companies can be listed on the Nasdaq Stock Exchange (since 1998). The index therefore reflects the performance of the 100 largest technology companies in the world.
- Nasdaq Composite: This index consists of all companies that are listed on the Nasdaq market. The shares of more than 3,000 companies are traded on this “electronic exchange”. These can be stocks of financial, investment, and technology companies in general.
- Nasdaq Biotechnology: Nasdaq Biotechnology consists of pharmaceutical and biotechnology companies that are listed on the Nasdaq stock exchange (and only need to be listed on that market, in addition to other requirements).
- Nasdaq Financial: includes all financial companies excluded from the Nasdaq 100.
Why Invest in Nasdaq?
Not all of them of the Nasdaq listed companies are technology companies. But the market is heavily geared towards this sector. The Nasdaq 100 index has a technology share of 54%. It shows the leading companies in this branch all over the world.
The strong performance of technology companies is traditionally associated with the expansionary phase of the business cycle. However, due to the great social changes we are experiencing, technology is increasingly present in our lives.
Technology has real applications in every aspect of our daily life. Let me just give you a few examples:
- transport (Vehicles with increasingly better equipment in terms of comfort and safety).
- telecommunications (social networks, new forms of entertainment and information, B2C, B2B, 5G, etc.)
- Healthcare (Robotics, biotechnology, etc.).
- Financial services (e-banking, fintech, robo-advisors, blockchain and cryptocurrencies, etc.).
- IT (home automation, cloud computing, artificial intelligence, big data, etc.)
While some analysts and investors are talking about the possibility that a bubble could arise from the growth this sector has experienced in recent years, the truth is that the profits made by technology companies and the advances they make can also increase the value of this type of company.
Many companies in this sector are among the ten largest Companies in the world:
- Alphabet (Google).
In other words: It's possible to find solid, cash-rich stocks with good balance sheet positions in the tech sector.
Tech companies have also always been associated with volatility. That is partly true: the volatility of this sector is slowly catching up with that of other, more mature sectors; they no longer have the same risk potential as in the 1990s and 2000s (when the dot com bubble burst).
To sum up what has been said so far, this is an industry with growing growth potential. The disruption caused by technology is changing this type of business. We can no longer talk about the venture industry as a whole; it has stable companies.
In any case, technology companies are characterized by the need for constant innovation, the quality of management is a factor that needs to be investigated:
This are high growth stocks. Good management can make all the difference (and turn a company into the new Facebook or Netflix).
Resources should be used as efficiently as possible.
How can you invest on the Nasdaq?
When considering investing on the Nasdaq, there are a number of options available to you, each with their own characteristics, advantages, and disadvantages.
Buying shares for cash
You can share one or buy multiple companies, which are listed on the Nasdaq. You can even create a basket of stocks representative of the market's performance (if it doesn't match any of the indices, then very similar). This option is the most classic and one of the lowest risk for the investor.
Though As mentioned above, there are stocksthat become more stable and the volatility of the tech sector (specifically the Nasdaq) is reduced, but one must remember that this is an equity investment and the risk is always there. One of the best ways to combat this is to diversify.
The problem is the lack of diversificationthat can be achieved through this method. Building a cash stock portfolio requires a large amount of capital.
Because of this, an investor mustunless he has a large starting sum and can track the index with the same weighting, analyze both the subsectors in which he wants to invest and the individual securities in order to compose his portfolio.
Examples of companies which are listed on the Nasdaq (and are included in the Nasdaq 100), are:
- Software: Microsoft, SAP, Oracle, IBM, Symantec, etc.
- Hardware: Apple, Samsung.
- Internet: Facebook, Google.
- Semiconductor: Intel, Qualcomm, Infineon Technologies.
- E-commerce: Amazon, Paypal.
- Biotechnology: illumina, Gilead Sciences.
Technology companies offer, with the exception of a fewr, typically not a high dividend yield. These types of securities, forced to constantly support innovation, must devote their own resources to research, development and innovation. And that puts some of the profit into the reserves to make those investments (which can be turned into growth, that's where management capacity and addressable projects come in).
Out this is why the dividend strategy works, which is typical of investors buying stocks with cash, not investing in the Nasdaq. The return comes primarily from capital gains that arise from selling and buying stocks.
On the positive side, it is possible to invest in the Nasdaq through individual stocks and not be as exposed to the technology sector. There are other companies listed on this market, many of which are part of the Nasdaq 100 index:
- Food: PepsiCo, Monster Drinks.
- Pharmaceuticals: Mylan, Alexion Pharmaceuticals, Celgene.
- Automotive: Paccar, O'Reilly Auto Parts.
- Transport: American Airlines Group.
If You now directly into the Nasdaq Investing through its index or looking to create a diversified portfolio focusing on Nasdaq-listed technology stocks, mutual funds are a good alternative.
Rather, these investment products are intended to bring the world of financial investments closer to the average saver. Investing in funds is easy and you automatically get a complete and diversified portfolio of stocks.
It gives index fundsthat replicate the performance of indices. This type of mutual fund can be a good option because they don't have to actively manage the portfolio (aside from regular realignment) and therefore have lower fees.
This makes it possible to invest in the entire Nasdaq market through a mutual fund that tracks the performance of one of its indices.
It is also possible to invest in the Nasdaq through actively managed mutual funds. In this case, the performance of the market itself is not exactly replicated. But if the manager does a good job, you can outperform the market.
Let the benefits of mutual funds can be summarized as follows:
- Diversificationbecause you have access to a complete portfolio.
- Professional management.
- Absolute liquidity.
- Tax benefits (especially in the case of capital transfers between funds).
- Financial futures.
To have a Fund on the Nasdaq all you have to do to invest is contact the fund's management or distributor.
Financial futures and options
Another possibilityInvesting in the Nasdaq is through financial derivative instruments. These types of instruments allow you to invest directly in an index. They are known as financial derivatives because they are products that are based on the price of other assets (called the "underlying").
In other words, it is possible to invest in the Nasdaq 100 by buying or selling futures or options on that index. It is also possibleto invest in individual stocks.
A Futures contract is a contract where the terms for buying and selling the underlying asset (e.g. stocks, indices, bonds, commodities, etc.) are set today, but delivery and payment is made on a future date. These contracts can be traded on an organized market at a specific price.
Options, on the other hand, are a similar tool. In this case, the buyer of the option (or options) is not obliged to perform the contract (the seller is). Depending on the price of the underlying, he can cancel the transaction if he feels that it is against his financial interests.
A certain amount of money must be left as a margin. The entire investment is not deposited (at least until the contract matures). This means that it doesn't take large capital to take large positions: capital can be multiplied. This is known as leverage.
In the case of options, the buyer must pay the seller a premium for the right to terminate the contract. If the contract is canceled, the buyer will lose this premium (this will be his maximum loss).
The leverage offers the chance for higher returns, but is also associated with a higher risk for the investor. In a historically volatile financial market like the Nasdaq, money and risk management must be a fundamental consideration.
Short and long transactions
The Ability to deliver any goods or price having to pay means an investor can sell them in the market without owning them. The idea is to buy them back later (before maturity) at a lower price and from one Profit from falling prices. This is called a "short sale" or "Opening a Short Position" designated.
The reverse operation, d. H. buying a futures contract and then selling it in the market if its value increases before the expiration date. This is known as “trading long” or “opening a long position”.
With options it is possible to buy or sell options that give you the right to buy (call options) or sell (put options).
advantages and disadvantages
Financial derivatives were created for two specific purposes:
- Risk coverage.
- Trade (speculation).
On this way you can spot stocks invest and cover any market decline by buying options or financial futures (short trading).
It is also possible, short term (short or long term) invest and multiply profits through leverage (without neglecting the right risk management).
In jIn either case, both are futures as well as options instruments that are quoted on the official market so that the volume of each contract, expiration dates and other details are standardized. If you want to trade on the Nasdaq, you have less flexibility (and bigger positions too).
CFDs (Contracts for Difference) are a type of financial derivative instrument that is not traded on an official market (it is an over-the-counter product). They are therefore more flexible productsintended for short term investments.
It is a contract between two parties, a buyer and a seller. Both parties decide to open a position on any financial asset and if the trader decides to close it, the price difference between the two points in time must be exchanged (to the trader's advantage or disadvantage).
As you can see, at no point is an asset physically acquired. Price differences between the opening and the termination of the process are simply offset.
The operation can be either short or long, which means you have the option to buy or sell a CFD: the trader has the option to make money on both the rise and fall of the Nasdaq (or individual stocks). Taking a short position is just as easy as taking a long position.
A Another important aspect is that CFDsUnlike futures and options, they do not have an expiration date. The trader can keep the position open as long as he wants.
As derivative products, they also offer leverage. However, if you are trading with a broker based in Europe, the maximum leverage is through the European Financial Market Authority (ESMA) limits:
- 1:20 for the major indices.
CFDs can use the Nasdaq index as an underlying asset or have individual stocks listed on this market. To trade CFDs on the Nasdaq, all you need to do is contact a broker that offers these derivative products, have little capital, and be able to trade. Opening an account with a broker is a simple process and is usually done entirely online.
It is extremely important that the broker with whom you open a trading account to trade on Nasdaq is regulated as it is an over the counter (OTC) market.
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