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How to invest in the NASDAQ Composite Index
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The NASDAQ Composite is the leading stock index in the world for tech stocks, so it could be the investment opportunity for you. There are many different ways to invest in the NASDAQ Composite Index, so we’ll go through them with you in detail to help you select the right option.
Where can I buy into the NASDAQ Composite Index?
What is the NASDAQ Composite Index?
The NASDAQ Composite Index (IXIC) is one of the three largest stock indices in the United States, alongside the S&P 500 and the Dow Jones Industrial Average. It consists of hundreds of different stocks, with a focus on technology accompanied by other stocks representing different growth industries.
Is it a good investment?
The NASDAQ Composite Index features a collection of stocks that tend to be both higher-growth and higher-volatility than more traditional indexes such as the Dow Jones Industrial Average Index. So it can be a good investment if you’re willing to accept more risk in exchange for a bigger potential reward.
The NASDAQ Composite index’s volatility increased in 2020, with the index plunging as global COVID-19 fears kicked in, then rebounding sharply once the US government began spending trillions to revive and stimulate the economy. Despite the volatility, the IXIC managed to perform well during the pandemic turmoil, skyrocketing more than 70% between 2020 and 2021. It became the second-best performing major U.S. index in 2021, with 21.39% gains, as reported by CNBC.
Before investing in the NASDAQ Composite index it is important to account for prevailing market conditions, as these will affect your chances of investment success.
How do I invest in the NASDAQ Composite Index?
Here are three important steps that you should follow when investing in the NASDAQ Composite Index:
- Choose an investment type
- Use our top tips to succeed
- Choose a platform to invest with
1. Choose investment type
The investment type that’s best for you will depend on multiple factors, such as how much each approach charges in transaction fees, and how high the level of customer service and investment advice provided by each option is. Here are some of the most popular methods that you can use to invest in the NASDAQ Composite Index:
An Exchange-Traded Fund (ETF) is an investment fund that can be traded on a stock exchange during regular stock market hours, in a similar way to individual stocks. ETFs usually include a collection of assets such as commodities or bonds, or a collection of stocks – and can be structured to track the performance of an index such as the NASDAQ Composite Index. A NASDAQ Composite Index ETF gives you access to a large, diversified batch of stocks, without the obligation to pay the management fees that come with a mutual fund (explained in more detail below).
If you want to focus on the top-performing stocks in the large NASDAQ Composite Index, you can buy each of the index’s stocks in separate trades instead. This allows you to evaluate each stock on its own merits, then whittle down your holdings until you own only the index’s top-performing stocks.
The problem with this approach is that the NASDAQ Composite Index contains about 3,300 stocks. So that’s 3,300 transactions you’ll have to make just to buy all of those stocks, let alone the many more you’ll need to execute to get down to the smaller number you want. Unless you are both very wealthy and have all the time in the world on your hands, this approach isn’t likely to be practical with the NASDAQ Composite index.
A mutual fund is an investment fund run by a professional money manager. You can buy a mutual fund through a broker, or through the company that administers the fund. The money manager pools money from many different investors, then invests the combined capital into different assets. A NASDAQ Composite Index mutual fund (also known as an index fund) allows you to invest in all of the NASDAQ Composite Index’s stocks at once.
Mutual funds come with multiple drawbacks, unfortunately. First, you can only buy a mutual fund at the end of the stock market’s trading day, not during regular market trading hours – as you can with an ETF. Another downside to mutual funds is that they charge higher fees than ETFs do. So if you’re going to invest in a NASDAQ Composite fund, your best bet might be to try to buy and hold for as long as possible in search of long-term gains, since a mutual fund is more difficult and more expensive to trade than an ETF.
2. Use our top tips to be a successful investor
Before you invest in the NASDAQ Composite Index, it’s worth your while to go over our top investment tips:
- Do your research. Take the time to analyse the NASDAQ Composite Index’s recent and historical performance, and how it stacks up against other investment opportunities. Once you’ve made your decision, you should create a tailored investment plan for yourself, deciding what your goals are in terms of gains, and how much you’re willing to lose. The more prepared you are, the better equipped you’ll be to keep your emotions in check if the market starts becoming volatile.
- Set a budget. The budget you set should account for your risk tolerance, as well as how much money you can afford to lose. Letting your losses pile up can crush your confidence. It can also eat up the investment capital you’ll need for future trades.
- Select the right platform. Figure out your specific investment goals before you look for a platform to handle your investments. The platform you choose can vary a lot if you’re interested in, say, low transaction fees (for which brokers are best), as opposed to top-of-the-line investment advice (in which case financial advisors have the edge).
- Grow your investments gradually. If you’re a novice investor, we recommend starting by investing a smaller amount of money. That way if you make a mistake due to inexperience, it won’t cost you very much. You can always ramp up the size of your trades as you gain experience and expertise.
- Think long-term. One viable investment strategy is to buy and hold the NASDAQ Composite Index, with an eye on landing bigger gains. That strategy can work during a bull market but not a bear market, since in bear market conditions indices tend to fall in value considerably.
3. Choose a platform to invest with
Here are some of the more popular options that investors use to invest in the NASDAQ Composite Index:
- Brokers & trading platforms. Online brokers offer easy-to-use tools that allow you to invest in the NASDAQ Composite Index quickly and inexpensively. However, what online stockbrokers don’t do is offer a lot of in-depth investment advice. So if you’re looking for more advanced, immersive investing advice, you should consider other options.
- Robo advisors. Robo advisors execute trades using algorithms, which keeps trading costs down. Despite their automated trade execution function, some robo advisors will allow you to discuss your investment strategy ahead of time with an actual human being. Still, a robo advisor doesn’t offer as hands-on an investing approach as a dedicated financial advisor does.
- Financial advisors. Financial advisors offer the most comprehensive level of investment advice. They’ll review your financial goals, run through lots of different investment options that you can choose, and help you meet your investing goals well after you’ve made your initial investment. Financial advisors do charge more for their services than what you’ll pay with other investment methods, though. That extra cost can be worth the price given the high level of customer service that financial advisors provide. But investing in the NASDAQ Composite Index isn’t overly complicated, so choosing a financial advisor likely won’t be worth the cost in this instance.
- Banks. Investing in the NASDAQ Composite Index with your bank gives you the convenience of storing all your financial ventures (such as your checking and savings accounts, your mortgage, and your investments) with one institution. But banks usually charge high fees, without providing the level of service that top financial advisors offer.
Ready? Here’s our top recommended broker
What should I do now?
If you’re ready to invest in the NASDAQ Composite, log into your online broker’s website, decide whether you want to buy NASDAQ Composite ETF, a NASDAQ fund, or every individual stock in the NASDAQ Composite Index in separate trades, then click buy. Once you’re invested, keep a close eye on your investment, so you can make an educated decision about when to hold and when to sell.
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