NASDAQ – What is it and How Does it Work?

Feb 22, 2021

What is the Nasdaq?

The Nasdaq Stock Market, also known as Nasdaq, is an American stock and securities exchange, known globally for being the second-largest stock exchange by market capitalization after the NYSE (New York Stock Exchange). Nasdaq is short for the National Association of Securities Dealers Automated Quotations.

Unlike many other stock exchanges, Nasdaq does not have a physical floor, and all trades are performed electronically. It was actually the very first fully electronic stock market in the world. All Nasdaq trades take place electronically via an automated network of computers.
Nasdaq also refers to the market index fund, the Nasdaq Composite, that follows the trends of Nasdaq and trades accordingly.

How does Nasdaq work?

Nasdaq is very popular amongst tech-oriented companies and other large blue-chip companies. Some of the major stocks you can trade on Nasdaq are Apple, Amazon, Microsoft, Facebook, Tesla, and Intel. The Nasdaq exchange has the highest trading volume in the US, with over 3,000 listed companies.

Nasdaq trades both listed and OTC (over-the-counter) stocks; the stocks listed on Nasdaq tend to be volatile as most of them are highly growth-oriented. Nasdaq stock ticker symbols normally have 4-5 letters.

Since its inception, Nasdaq was designed to offer automated quotations. It has facilitated so many OTC transactions of the years that the name ‘Nasdaq’ became synonymous with ‘OTC’. Nasdaq eventually added automated trading systems and soon became the very first exchange to facilitate online trading.

What are Nasdaq’s trading hours?

Nasdaq opens at 9:30 am and closes at 4:00 pm ET Monday to Friday. It is closed on nine market holidays a year, such as New Year’s Day, Christmas, Good Friday, etc. Nasdaq also offers extended trading hours, know as pre-market and after-hours sessions. Pre-market trading hours are 4:00 am to 9:30 am. After-hours sessions are from 4:00 pm to 8:00 pm ET.

What are the listing requirements for the Nasdaq?

Naturally, Nasdaq will not list just any company on its’ exchange. In order to join the Nasdaq family, the company needs to have a solid reputation and fulfill certain important criteria. There are four sets of listing requirements. Depending on the set of listing requirements, the company’s stock will be allocated in one of the following three market tiers:
  • Capital Market: In this tier, there are stocks of companies with smaller market capitalizations.
  • Global Market: In this tier, there are stocks of companies listed in the United States and internationally, with mid-cap market capitalization.
  • Global Select Market: This tier is made up of the stocks of U.S. and international companies weighed based on market capitalization – so the crème de la crème of the business world. To be listed here, companies must pass Nasdaq’s highest listing requirements and maintain the criteria.

Listing criteria

Minimum threshold for issued shares: To be listed on Nasdaq, companies must have at 1,250,000 publicly traded shares outstanding, not including those held by officers, directors, or any other beneficial owners.

Minimum share price: At the time of listing, the regular bid price of a share of the company’s stock must be at least $4. It’s possible to qualify with a lower share price if the company fulfills other criteria.

Minimum shareholders: The company must have at least 2,200 total shareholders or 550 total shareholders with a 1.1 million average trading volume over the past year.

Application fee: To be considered for listing, the company must pay a $25,000 application fee. Should the application be successful, the company will pay somewhere between $150,000 and $295,000 as an entry fee.

In addition to the above requirements, companies must fulfill all of the criteria under at least one of the following standards:

Earnings: To be listed on Nasdaq, companies must have net earnings of at least $11 million in the last three years as well as no net losses in the last 3 years. Alternatively, they may have earnings of $2.2 million in the last two years.

Capitalization with cash flow: The company must have a cash flow of at least $27.5 million for the past three years, as well as no negative cash flow in any of those three years. In addition to this, the company’s average market cap must be at least $550 million in the last year.

Capitalization with revenue: If the company’s average market capitalization over the last year is $850 million or more, then they can be exempt from the cash flow requirement.

Assets with equity: Companies can avoid the cash flow and revenue requirements if their entire assets total at least $80 million and their stockholders’ equity is at least $55 million.

Nasdaq’s performance

Since Nasdaq mainly consists of tech stocks, its’ overall performance has been very strong in the past years, as we entered the age of Information. In mid-2020, Nasdaq has reported a five-year return of 118% and a ten-year return of 426%.