The Dow vs. The Nasdaq: An Overview
Both "the Dow" and "the Nasdaq" refer to U.S. stock market indexes: lists of equities from various sectors that investors can track. Both are widely followed and often referenced, so much so that sometimes they become synonymous with the stock market itself or the U.S. economy overall—they aren't exactly, however. Instead, they are theoretical snapshots of the equities market that can provide investors with an idea of how the stock market is performing or the economy is trending.
Key Takeaways
- Both the Dow and the Nasdaq represent a stock market index, or an average of a great many numbers derived from the price movements of certain stocks.
- The Nasdaq also refers to an exchange where investors can buy and sell stocks.
- Neither the Dow nor the Nasdaq literally means the stock market or the economy, though they sometimes are used as bellwethers of both.
- Investors cannot trade the Dow or the Nasdaq indexes because they are representations of the performance of a grouping of stocks in the form of a mathematical average.
- However, investors can purchase index funds—either mutual funds or exchange-traded funds (ETFs)—that track these indexes.
The Dow
"The Dow" actually refers to theDow Jones Industrial Average (DJIA), an important index that many people follow in order to get an indication of how well the overall stock market is performing.
The DJIA is notthe same as Dow Jones and Company, a firm that is owned by News Corp. and publishes The Wall Street Journal. Rather, the index is one of many indexes owned byS&P Dow Jones Indices LLC.
The DJIA is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. The DJIA was invented by Charles Dow in 1896. It measures the performance of some of the United States' biggest blue-chip companies. The industrial part of the name is largely historical; very few of the index's component companies have anything to do with heavy industry anymore.
The Nasdaq
The Nasdaq is a term that can refer to two different things. The first is the National Association of Securities Dealers Automated Quotations stock exchange: the first electronic exchange that allowedinvestors tobuy and sell stockon a computerized, speedy, and transparent system without the need for a physical trading floor.
The second reference is to an index.Actually, there are several indexes composed of stocks that trade on the Nasdaq; but when you hear people say that "the Nasdaq is up today," they are usually referring to the largest one: the Nasdaq Composite Index, which, like the DJIA, is a statistical measure of a portion of the stock market.
Key Differences
Both the Dow and the Nasdaq, then, are terms that refer to an index, or an average of a great many numbers derived from the price movements of certain stocks; however, they are quite different lists.
The Nasdaq contains all of the companies that trade on the Nasdaq. Most are technology and Internet-related, but there are financial, consumer, biotech, and industrial companies as well. It is often seen as a stand-in for the technology sector and its performance.
3,522
The number of stocks that trade on the Nasdaq exchange as of July 11, 2023. Some 2,500 of them comprise the Nasdaq Composite Index.
In contrast, the DJIA is composed of a mere 30 stocks, mainly of companies found on the New York Stock Exchange, with only a few of Nasdaq-listed stocks such as Apple (AAPL), Intel (INTC), Cisco (CSCO), and Microsoft (MSFT).
However, as these names—along with others like The Coca-Cola Company (KO), IBM (IBM), and American Express (AXP)—would suggest, DJIA companies are heavy-hitters in the equities universe and corporate world. Their performance greatly impacts the stock market overall.
Special Considerations
Investors may follow the Dow and Nasdaq, but they cannot literally trade them because they are not investments, but indexes—representations of the performance of a grouping of stocks in the form of a mathematical average.
However, investors can purchase index funds—either mutual funds or exchange-traded funds (ETFs)—that track these indexes. That is, they purchase and hold in their portfolios the equities that comprise the indexes. In this way, their performance basically duplicates that of their benchmark index—minus expense ratios and commissions, of course.
What Is the Difference Between the Dow, the S&P 500, and the Nasdaq 100?
The Dow is the Dow Jones Industrial Average (DJIA) which is a stock market index made up of 30 of the most prominent companies in the U.S. The S&P 500 is a stock market index made up of 500 of the largest companies in the U.S. by market cap. The Nasdaq 100 is a stock market index made up of 100 of the largest non-financial companies by modified capitalization that trade on Nasdaq exchanges.
Can a Company Be in the Dow and the Nasdaq?
A company that is on the Nasdaq can also be in the Dow. The Dow represents 30 of the most prominent companies in the U.S. regardless of which exchange it trades on. Many of the companies included in the Dow index are listed on the Nasdaq exchange, such as Apple and Microsoft.
Are All of the Companies in the Dow Also in the S&P 500?
Yes, all of the companies in the Dow are also in the S&P 500. The Dow focuses on 30 prominent U.S. companies on all exchanges while the S&P 500 focuses on 500 of the largest companies in the U.S. by market cap. As such, the design of the S&P 500 will include the companies in the Dow.
The Bottom Line
Both the Dow and the Nasdaq are stock market indexes that provide insight into the broader economy. While the Nasdaq is also a stock exchange, the Dow is purely a stock market index. The Dow does include stocks on both the NYSE as well as the Nasdaq, whereas any Nasdaq indexes will include only stocks listed on Nasdaq exchanges. Investors can gain exposure to both the Dow and the Nasdaq by investing in index funds that track the indexes.
