We’ve heard of “The Nasdaq” or “The Dow”. Even if you’re not really into the world of investing, you’ll have heard the national news anchor reporting something like “The Nasdaq is up by X points”. What does that actually mean though, and what is the difference between the Nasdaq and the Dow anyway? And what about the S&P 500?
To start with, don’t get confused between “Dow Jones and Company” and “the Dow”. The same goes for the Nasdaq exchange and the Nasdaq we’re talking about here. What we’re talking about here aren’t companies or products, they’re indices (or indexes) – a way of tracking the average performance of a bunch of different stocks. The fundamental difference between the following four indices lies in the stocks that they track. Let’s take a look.
To give it its full title, the Nasdaq Composite Index tracks around 3,300 different listings on the Nasdaq exchange. Calculations are made based on market capitalization, and final day values are calculated at 4:16pm daily. This is the index to look at if you’re interested in technology, but due to its scope, it’s also one of the most followed indices in the world.
“The Dow” refers to the Dow Jones Industrial Average (DJIA). This index only covers 30 stocks, but they’re all from major companies in the US. Think Goldman Sachs, Apple, Intel and Nike – household names. Unlike the Nasdaq though, this index is price-weighted. This means that a fluctuation on a stock with a higher price has a greater impact than a change in a lower-priced stock, even though the relative percentage will be lower. For that reason, the DJIA isn’t necessarily as reflective of overall stock market performance as the Nasdaq.
- S&P 500
You can think of the S&P 500 (Standard and Poor’s 500) as the bigger brother of the Dow in many ways. It covers 500 of the most traded stocks in the country and is really diversified – no weighting towards technology like the Nasdaq. The main difference between the S&P 500 and the Dow though, is that the S&P is market capitalization weighted – as the Nasdaq is. This fact, combined with the larger amount of coverage, means that the S&P 500 is a real solid way of seeing how the market has done overall.
Of course, these aren’t the only stock market indices out there. Other well-known indices include the Wilshire 5000, which is as close to a complete list of all actively traded stocks in the US as you’re going to get, or the Russell 2000, which is an index exclusively for small cap stocks. Whatever your focus though, there’s an index out there for you, so get searching!