What's the difference between a stock exchange index and a stock exchange?
|For many first-time investors, some financial market terminology can be confusing. A question that often crops up is ‘what is the difference between the Nasdaq and the nasdaq100?’. Effectively this question can be answered by defining the difference between a ‘Stock Exchange’ and a ‘Stock Exchange Index’.
What is a stock exchange?
A Stock Exchange is a marketplace where the buyers and sellers of company stock (aka shares) can transact.
The owners of Stock Exchanges oversee that the companies whose stock is listed adhere to rules that ensure fair market conditions for buyers and sellers. In short, they make sure that companies are continually disclosing information that buyers and sellers would deem necessary to make informed financial decisions regarding the buying, holding, or selling of stock.
The organisations that oversee Stock Exchanges earn the bulk of their revenue from transaction fees. In fact, Stock Exchange companies can be incredibly lucrative. In 2020, the largest Stock Exchange in the world, the New York Stock Exchange (NYSE), generated US $50.9 billion in revenue. The next largest Stock Exchange in the world, the Nasdaq, generated US $5.6 billion in revenue in the same year.
Interestingly, many organisations that own exchanges are themselves listed on exchanges. The owner of the NYSE, Intercontinental Exchange (NYSE: ICE), can be found on none other than the NYSE. The owner of the Nasdaq, Nasdaq Inc (NASDAQ: NDAQ), is, of course, listed on the Nasdaq.
What is a stock exchange index?
A Stock Exchange Index is a way to measure the stock performance of companies listed on Stock Exchanges. Companies can be grouped by size, industry, or several other categorisations.
The performance of the companies in an index informs the performance of the index. Essentially, if the share price of the companies in the index are rising, so will the index.
A Stock Exchange Index may measure the entire Stock Exchange or only a section of the Stock Exchange. For example, the Nasdaq 100 measures the performance of the largest 100 companies that are listed on the Nasdaq. The Nasdaq Composite is a similar Stock Exchange Index, except this Index does not discriminate. As such, the Nasdaq Composite is representative of all 3,700 companies listed on the Nasdaq.
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