Overview:
The Nasdaq 100 is one of the most frequently cited “technology” indices. Because it tracks stocks traded on the Nasdaq exchange, it is often considered a technology barometer despite the fact that many healthcare, biotech, and service issues trade there as well. Though it was introduced in 1985, the tracking fund was formally launched near the height of the Internet bubble in March of 1999. It has quickly become the most actively traded index on the market.

Composition:
The Nasdaq 100 Index is comprised of the 100 largest stocks (based on market capitalization) traded on the Nasdaq National Market. This index is computed using a modified market weighting. Although firms with the largest market caps tend to have the largest influence on the index, its value is modified to keep any issues from having an "overwhelming" effect on the index results. The actual computation methods are proprietary to the Nasdaq.

The table below shows the percentage that each stock represents in the index. For example, Microsoft (MSFT) has a market cap 5X larger than that of Qualcomm (QCOM), yet it only boasts a 50% greater weighting in the index. This keeps the index from being dominated by a handful of stocks. On the other hand, even with this modified weighting, the top 10 stocks still account for about 40% of the Nasdaq 100's total value.

Positives:
The Nasdaq 100 gives investors a quick snapshot of how some of the nation's largest technology firms are faring. It includes almost all of the country's top technology stocks, so it is a better proxy for this sector than most other indices.

Drawbacks:
The Nasdaq 100 is heavily weighted toward technology stocks, making it difficult to use as a gauge for the overall market. This tech-heavy focus also makes the index extremely volatile compared to other indices. Though the Nasdaq 100 will generally follow the same trend as other indices (such as the S&P 500), it is not uncommon for it to be twice as volatile as others indices on strong up or down days.

How can I trade/invest in this index?
The NASDAQ 100 trades under many forms. Hedge funds, daytraders and personal investors often use the index as a means to speculate or hedge their portfolios. Because of its wide usage, the Nasdaq 100 is one of the most heavily traded indices on the planet. Most investors are familiar with the wildly popular Nasdaq-100 Trust (symbol QQQ, also commonly referred to as the "q's" or "cubes)--an exchange-traded fund (ETF) that tracks the Nasdaq 100. This ETF is one of the most liquid issues on the Nasdaq, and with an expense ratio of 0.18%, it is probably the most efficient way to trade this index.

Additional Information:
Nasdaq 100 fact sheet  
Nasdaq 100 (QQQ)  

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