It’s a question you’ll frequently hear during any program discussing the latest financial news: “What did the market do today?” The answer often includes a reference to an index such as the Dow Jones Industrial Average, the or the Nasdaq. But what are these? And what distinguishes one from the other?
What are the Dow, Nasdaq and S&P 500?
Before diving into the differences between the Dow vs. the Nasdaq vs. the S&P 500, it’s important to understand the key commonality among them: In this context, they are all referring to market indexes — not stock exchanges. Each of these three major stock indexes tracks a certain subset of stocks, and the movements — day to day, month to month and year to year — offer a view of how the broader market is performing and the sentiment among investors.
The Dow Jones Industrial Average
The Dow Jones Industrial Average — often shortened to the Dow — is the most well-known and longest-running market index. It’s been around since 1896, and it consists of 30 blue-chip, U.S.-based companies that trade either on the New York Stock Exchange or the Nasdaq exchange. Some of the largest publicly traded companies in the country — Apple, Coca-Cola, Home Depot and Nike, to name a few — are included in the Dow.
While the Dow carries plenty of historical significance, its limited scope of just 30 companies and the fact that the index is price-weighted rather than being weighted by the value of the company make it an unreliable barometer of the entire market. When you hear about the Dow, some of those references may be intended to make the movement of the day seem more dramatic. Consider which of these headlines is bound to get more attention: “The Dow fell 390 points today,” or “The S&P 500 was down 50 points today.” In both cases, the decline is roughly 1 percent.
There is, however, a time when activity in the Dow is headline-worthy: when the makeup of those 30 companies changes. For example, in February 2024, the index replaced Walgreens Boots Alliance with Amazon.com. That’s a moment of prestige for the companies making their way into the index and a reflection of recent underperformance or loss of relevance for companies that are being removed from the list.
The Nasdaq
At first glance, hearing “the Nasdaq” may feel a bit confusing because it is a stock exchange. However, the Nasdaq Composite and the Nasdaq 100 are both market indexes that represent the ups and downs of particular stocks that are listed on the Nasdaq exchange.
The Nasdaq Composite includes more than 2,500 stocks traded on the Nasdaq, and the Nasdaq 100 includes 100 large non-financial stocks — Starbucks, Netflix, Tesla and PepsiCo, to name a few — traded on the Nasdaq. The Nasdaq indexes are usually cited as a reference to the performance of technology stocks, but stocks from various industries are included in the Nasdaq averages.
The S&P 500
The includes 500 large, U.S.-based publicly traded companies, including all those listed in the Dow Jones Industrial Average, regardless of the stock exchange that is home to their trading activity. Though this index includes just 500 of the more than 6,000 publicly traded U.S. stocks, the S&P 500 tells a more complete story of what the market is doing than the Dow or Nasdaq 100. It represents about 80 percent of the value of all publicly traded companies in the U.S., according to S&P Global. The S&P 500 weights companies by their total market capitalization (the stock price multiplied by the number of each company’s outstanding shares). This formula means that larger companies carry more weight than smaller companies. In fact, more than 25 percent of the value is in Apple, Microsoft, Nvidia, Amazon, Meta Platforms, Alphabet and Tesla.
Because the S&P 500 contains hundreds of large companies and represents the lion’s share of total stock market value, it is considered a much better gauge of how the market is performing, even though it excludes thousands of smaller and midsize companies. It’s important to note that the S&P 500 changes on a more frequent basis than the Dow as companies grow their way into the mix and other companies are no longer considered large enough to be included.
Many investors use low-cost index funds that track the S&P 500 as a way to participate in the stock market. There are more narrowly-focused index funds available, but are a simple way to get a diversified basket of stocks at a low cost.
Alternatives to the Dow, Nasdaq and S&P 500
The Dow, Nasdaq and S&P 500 aren’t the only games in town for understanding the market’s performance. The Wilshire 5000 is designed to represent the entire U.S. stock market, and the Russell 2000 is solely focused on small-cap stocks. While these less-established companies tend to carry greater potential for risk, they also offer what every investor wants: more room to grow and profit.
Bottom line
The Dow, Nasdaq and S&P 500 are major market indexes. The Dow tracks 30 large U.S. companies but has limited representation. The Nasdaq indexes, associated with the Nasdaq exchange, focus more heavily on tech and other stocks. The S&P 500, with 500 large U.S. companies, offers a more comprehensive market view, weighted by market capitalization. Other indexes, like the Wilshire 5000 and Russell 2000, cover broader market segments.
FAQs
The Dow tracks 30 large U.S. companies but has limited representation. The Nasdaq indexes, associated with the Nasdaq exchange, focus more heavily on tech and other stocks. The S&P 500, with 500 large U.S. companies, offers a more comprehensive market view, weighted by market capitalization.
What is the difference between S&P 500 Dow Jones and Nasdaq? ›
The Nasdaq is another kind of scoreboard that looks at tech companies, and it has a lot more companies than the Dow. The S&P 500 includes 500 large companies and gives a broader look at the stock market. Understanding these indices is important for those interested in investing in US stocks.
Should I buy Dow Jones or S&P? ›
The Bottom Line
While both the DJIA and S&P 500 are used by investors to determine the general trend of the U.S. stock market, the S&P 500 is more encompassing, as it is based on a larger sample of total U.S. stocks.
Why is the Dow Jones more popular than the S&P? ›
In these circ*mstances, one contributing factor is that historically The Dow has been somewhat more value-oriented, tracking well-established large-cap companies whose prices can tend to be less volatile. The S&P 500, while more diversified than The Dow, is sometimes more volatile.
What is the Dow Jones for dummies? ›
Price-Weighted Index: The Dow Jones is a price-weighted index, meaning that higher-priced stocks have a greater impact on the index's movements. This can skew the performance of the index and may not accurately reflect the overall market.
Should I buy Nasdaq or S&P 500? ›
So, if you are looking to own a more diversified basket of stocks, the S&P 500 will be the right fit for you. However, those who are comfortable with the slightly higher risk for the extra returns that investing in Nasdaq 100 based fund might generate will be better off with Nasdaq 100.
Who really owns a company that sells shares of its stock? ›
A shareholder is a person, company, or institution that owns at least one share of a company's stock or in a mutual fund. Shareholders essentially own the company, which comes with certain rights and responsibilities.
What style of investing did Warren Buffett use? ›
Buffett follows the Benjamin Graham school of value investing which looks for securities with prices that are unjustifiably low based on their intrinsic worth. Buffett looks at companies as a whole rather than focusing on the supply-and-demand intricacies of the stock market.
Does the Nasdaq outperform the S&P 500? ›
Historical Performance
Amidst recent market volatility, the Nasdaq-100 Total Return Index has consistently sustained cumulative total returns exceeding twice the performance of the S&P 500 Total Return Index.
What are the disadvantages of Dow Jones? ›
Currency risk is a significant disadvantage of investing in the Dow Jones BRIC50 Index. As mentioned earlier, the index comprises companies from different countries, and each country has its currency. The value of these currencies can fluctuate, which can impact the return on investment.
However, its bankruptcy following the financial crisis led to its removal. Since then, the Dow has gone more than a decade without representation from the auto industry. Many investors note that Tesla's potential goes well beyond its vehicle manufacturing. For now, though, Tesla is squarely focused on cars and trucks.
Are all Nasdaq-100 companies in the S&P 500? ›
The Nasdaq-100 is quite different than the S&P 500
But all of the largest companies in the Nasdaq-100 are also included in the S&P 500 index, including Apple, Microsoft, Amazon, Alphabet, Facebook, and (now) Tesla.
Why is S&P 500 the best? ›
The S&P is a float-weighted index, meaning the market capitalizations of the companies in the index are adjusted by the number of shares available for public trading. Because of its depth and diversity, the S&P 500 is widely considered one of the best gauges of large U.S. stocks, and even the entire equities market.
Why should I invest in Dow Jones? ›
Stocks to consider
The Dow Jones Industrial Average contains 30 different businesses that are considered blue chip names. They have profitable histories and have come to dominate their respective industries.
What is the highest the Dow has ever been? ›
The Bottom Line. The Dow posted its all-time high during intraday trading on Feb. 23, 2024, reaching a peak of 39,282.28 points. The highest close occurred the same day when the index closed at 39,131.53 points.
Should Christians invest in the stock market? ›
Our faith calls us to be responsible stewards of the resources entrusted to us by God. The stock market presents a unique opportunity for faithful stewardship. Consider Matthew 25:14-30. Here, Jesus teaches us about the importance of investing our resources wisely and multiplying them for the glory of God.
How do you read the S&P 500? ›
The price of the S&P 500 index that you see quoted – for example, 4,301.56 – is measured in points, not dollars. That's the weighted average value of all the index's components. As the component stocks move up or down, the index rises or falls according to the calculation.
Does the S&P 500 include Nasdaq stocks? ›
The index includes 500 of the largest (not necessarily the 500 largest) companies whose stocks trade on the New York Stock Exchange (NYSE), Nasdaq, or Chicago Board Options Exchange (CBOE). Like popes and Oscar winners, the components of the S&P 500 are selected by a committee.
How many companies are there in Nasdaq? ›
Understanding the Nasdaq
There are more than 5,000 companies that are listed and traded on the exchange on a daily basis. Many of these companies are major technology companies, such as Apple (AAPL) and Microsoft (MSFT).
Where is Nasdaq located? ›
The Nasdaq Stock Market (/ˈnæzdæk/; National Association of Securities Dealers Automated Quotations) is an American stock exchange based in New York City.
