Introduction to the NASDAQ Composite Stock Index for Kids and Teens
This video explains the concept of the NASDAQ Composite Stock Index in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about the NASDAQ Composite, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- What is the NASDAQ Composite Stock Index
- Which types of stocks are there in the NASDAQ Composite
- What does the NASDAQ index’s value represent
- How can you invest in the NASDAQ Composite Stock Index
What is the NASDAQ Composite Stock Index?
It was created in 1971, the same year the NASDAQ stock exchange was created.
It primarily focuses on technology stocks like Apple, Alphabet, Amazon, Facebook and Netflix and is therefore a good way for people to tell how tech stocks are doing.
Which types of stocks are in the NASDAQ composite? And how do they get included?
Around 50% of the NASDAQ Composite consists of tech stocks. The other major sectors are consumer services, healthcare, and financials.
To be part of the NASDAQ composite, a stock must be listed on the NASDAQ stock exchange, and continue to be listed there.
And unlike many other indexes, stocks don’t need to be US based to be part of the NASDAQ composite. International stocks can also be part of the NASDAQ composite.
What does the NASDAQ index value represent? Is it a dollar amount?
No. The NASDAQ’s value is measured in points.
When the NASDAQ Composite was created in 1971, it had 100 points. As of November 2020, NASDAQ’s value has grown to almost 12,000 points.
The point value of the NASDAQ Composite is calculated using a market capitalization-weighted formula. This means that each stock’s weight in the index is decided by the market capitalization of the company.
For example, if stock A’s company has a market cap of $10 billion dollars, and stock B’s company has a market cap of $20 billion dollars, then stock B will have double the weight – or power to change the value of the NASDAQ Composite – as stock A, because it has double the market cap.
How do I invest in the NASDAQ composite?
But remember, since the NASDAQ is Market Capitalization weighted – like the S&P 500 – and many of its stocks are the largest companies in the world, the stock index is very heavily weighted in just a few stocks.
In fact, although the NASDAQ composite has about 3300 stocks, a third of its weightage is from its 10 largest stocks as of November 2020!