Stock Market Tips: Introduction to the Nasdaq Biotechnology Index

The Nasdaq Biotechnology Index (NBI) is a measurement tool consisting of a compilation of companies that meet Nasdaq's 'eligibility criteria'. The index was introduced on November 1, 1993 and the businesses it is comprised of have been monitored over time as a performance metric for the biotechnology sector of the economy. As prices of each company's stock fluctuate a change is noted on the index. These changes are recorded daily and represented in the form of a graph. Every half year the companies are evaluated for compliance with listing criteria and each year companies may be removed or added from the index. As of July 2007, there are approximately 172 companies listed on the index.

How the Index Works:

The stocks represent a big pool of companies whose sizes are different. Since each company's size is different the affect it will have on the index should be proportionate. To make the index proportional, each stock's influence on the index metric is weighted according to its capitalization. The Nasdaq calls this "Modified Capitalization-weighted". The final computation results in a value that is based at a starting value.

The most important thing to know about this term is that it is a mathematically derived proportionality of each company's influence on the index based on the value of outstanding shares. If an index weights the companies in a portfolio using a weighted average it is providing a more accurate assessment of the index value.