How to Understand the Nasdaq Composite Index

You've heard about the tech-rich Nasdaq, the exchange that many high-tech stocks are traded on. To understand the volatile - and profitable - Nasdaq Composite Index, read on.

Difficulty:

Moderate

Instructions

Things You'll Need

• Internet Access
• Computers
• Wall Street Journal

1. Find the most recent Nasdaq Composite Index at the Nasdaq Web site (nasdaq.com). Local newspapers usually cite the index as of the close of business on the previous trading day.

2. Understand that the index is a measure of the combined value of roughly 5,000 stocks traded on the National Association of Securities Dealers Exchange, or Nasdaq.

3. Know that the index figure is based on the last-sale price of each stock and is updated throughout the trading day.

4. Know that each stock's impact on the index is "market-value weighted." That means an individual stock's impact on the index reflects the last-sale price multiplied by the number of shares outstanding.

5. Use the index to gauge the relative value of Nasdaq stocks over time.

6. Compare the index with other market indicators, such as the Dow Jones industrial average or the S&P 500 Index, to get a broader view of market trends.

7. Assess the health of the market by evaluating index trends. A steadily declining index might reflect waning investor confidence in the economy; a rising index might indicate the opposite.

8. Compare the Nasdaq Composite Index with other Nasdaq indexes, such as the Nasdaq Biotechnology Index or the Nasdaq Bank Index, to see which sectors are deviating from market trends.

Tips & Warnings

• Consider investing in mutual funds tied to an index. The majority of mutual funds underperform the market. Some companies try to avoid this embarrassment by creating funds that follow market indexes.