💡 MicroStrategy Added To The Nasdaq: What Does That Mean?

Issue 146

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Today’s Bullets:

• How the Nasdaq-100 is Determined

• Who’s In / Who’s Out

• The QQQ Factor

• Bitcoin Trojan Horse

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Inspirational Tweet:

By now you may have heard some announcements and news about MicroStrategy being added to the Nasdaq-100 stock index.

And this may have you asking: Great, what the heck does that mean?

If so, or if you just want to understand the implications a bit better, then you’re in the right place. Because we’re going to unpack this financial jargon and the reality around it, nice and easy as always, today.

So, pour yourself a big cup of coffee and settle into a comfortable seat for some simplified index talk with The Informationist.

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👑 How the Nasdaq-100 is Determined

So nobody feels stupid around here, we’ll first cover the basics. Like, what is the Nasdaq-100, anyway?

Just like the Dow Jones Industrial Average (often just called the Dow) is a stock market index of 30 prominent companies listed on exchanges in the US, and the S&P 500 Index which tracks the performance of 500 of the largest companies listed on exchanges, the Nasdaq-100 consists of the 100 largest non-financial companies listed on the Nasdaq Exchange.

Some key aspects and requirements for inclusion in the Nasdaq-100:

• Market Capitalization: Companies must rank among the top 100 non-financial entities by market cap

• Liquidity: Stocks must have sufficient trading volume to ensure ease of buying and selling

• Listing Requirements: Companies must be listed exclusively on the Nasdaq and, of course, meet the exchange’s financial, governance, and operational standards

• Non-Financials: Financial companies such as banks or investment firms are excluded, making the NASDAQ-100 different from indices like the Dow or S&P 500

OK, so the biggest Nasdaq companies are included in the index and the index follows the companies, but how are they tracked as a group? And are any companies more important than others?

This is where weightings, an extremely important part of indices, comes into play.

See, much like the Dow and S&P 500, the Nasdaq-100 is market-capitalization weighted, which means a company's weight in the index is proportional to its market capitalization.

A couple of rules though:

• No single company can exceed 24% of the index's total weight, preventing dominance by mega-cap companies like Apple or Google

• Companies with a weight of 5% or more are capped to maintain diversification

For example, if Apple makes up 9% of the index’s total market cap and Microsoft makes up 7%, each of their weights will be reduced to 5% during the annual rebalancing.

Then, the excess weight removed from all capped companies is redistributed proportionally to the remaining companies in the index.

In this case, Apple’s excess 4% and Microsoft’s excess 2% would be spread across the rest of the index proportionally.

About the rebalancing.

The Nasdaq-100 undergoes a thorough rebalancing every December, to make sure the index reflects market changes annually.

And so, as you can imagine, some companies in the Nasdaq lost value in the year and some gained value.

The Nasdaq looks at these movements and, just like Premier League relegations, sends some companies back to the minors and calls some companies up to join premier Nasdaq 100 Index.

Which is exactly what just happened to Microstrategy (MSTR) this week.

Let’s see who else was affected, and what all this matters to you and other investors.

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🎩 Who’s In / Who’s Out

Before yesterday, my good friend and Bloomberg analyst James Seyffart (@JSeyff on X) researched the situation and made some predictions, including expected weights in the rebalanced Nasdaq-100.

Here’re the companies he predicted would drop out:

That’s right. Super Micro, Illumina Inc, and lo and behold, the medical marvel company Moderna.

Aww. What a shame.

Poetic justice perhaps, now that the Big Pharma CEOs all have their vaccine-financed yachts paid off?

I digress.

James also predicted the entrants.

He was looking for Palantir Tech, Axon, and, yes, MicroStrategy to all make the cut and be promoted to the Nasdaq-100 Premier League.

And now that the Nasdaq has done its annual review, as of yesterday we have the official list of dropouts and new entrants into the index.

How did James do?