Investors should be interested in learning more about the Nasdaq and the Dow Jones. Find out how each of them works and explore what the key differences between the two are with this guide.
The Dow and the Nasdaq are US stock market indexes that provide a snapshot insight into how the stock market is performing overall — by tracking diverse equities from various sectors. While neither the Dow nor the Nasdaq literally represents the stock market or the wider economy, the indexes are commonly used interchangeably with these terms and are widely considered to represent them.
Investors cannot directly trade either the Dow or the Nasdaq, but they can invest in various index funds or ETFs that mirror the benchmarks from them.
Some ETFs that mirror the Nasdaq Composite Index include: Invesco QQQ Trust ($QQQ) and Proshares UltraPro QQQ ($TQQQ), while an ETF that tracks the Dow Jones Industrial Average is the SPDR Dow Jones Industrial Average ETF ($DIA.US).
What is the Dow?
“The Dow” refers to the Dow Jones Industrial Average (DJIA), a stock market index that tracks 30 popular, commonly traded, blue-chip companies traded on the New York Stock Exchange (NYSE) and the Nasdaq exchange.
The Dow is one of the best-known and longest-running market indexes. Some of the most popular and well-known public companies in the US are tracked by the index, including Goldman Sachs, Nike, Apple, Johnson & Johnson, Coca-Cola, Visa and Microsoft.
Unlike other popular stock market indexes, such as the S&P 500 and the Nasdaq Composite Index, which both use market capitalisation metrics, the Dow is weighted by stock price. Because of this, the 30 companies that comprise the index do occasionally change, in order to keep it balanced.
For instance, when Apple split in 2020, the price of a single share in the company changed. The Dow, in turn, needed to adjust its weighting to accommodate this change and keep its weight balanced.
Tip: The Dow was named after its two founders, Charles Henry Dow and Edward Davis Jones.
Some other indices that are based on the Dow Jones data also exist, including the Dow Jones Sustainability Index and the Dow Jones Oil & Gas Index. There are also a number of popular index funds and ETFs based on the index, but generally, when someone refers to “the Dow,” they are referring to $DIJA.
The New York Stock Exchange (NYSE), where Dow Jones companies mainly trade, is open from 9:30AM–4:00PM (Eastern Time).
What is the Nasdaq?
The term “the Nasdaq” can refer to two different things:
- A stock exchange called the National Association of Securities Dealers Automated Quotations. Created in 1971, this was the first electronic exchange that allowed investors to trade stocks outside of a physical trading floor.
- An index. While there are several indexes that track stocks traded on the Nasdaq, generally, the term refers to the largest index, the Nasdaq Composite Index, which is a metric measure of a portion of the stock market. The Nasdaq 100 is another notable stock market index, made up of 100 of the largest non-financial companies (by market cap) that trade on Nasdaq exchanges.
What is the Nasdaq stock exchange?
The Nasdaq is the second-largest stock exchange in the world, smaller only than the New York Stock Exchange (NYSE). Like the Dow, the Nasdaq stock exchange is used as the basis of many popular trading instruments, including index funds and ETFs.
The Nasdaq Stock Market, where Nasdaq-listed companies trade, is open from 9:30AM- 4:00PM (Eastern Time).
What is the Nasdaq Composite Index?
The Nasdaq Composite Index is a market index that features all of the companies that trade on the Nasdaq stock exchange. Most of these are technology stocks, but it also includes stocks from other sectors, ranging across the consumer, biotech and industrial industries.
It is weighted by market capitalisation, which means that larger companies with higher market caps have more influence on price movements in the index.
What differentiates the Dow and the Nasdaq?
The Nasdaq Composite Index and the Dow Jones are both stock market indexes that provide a snapshot of how the overall market and wider economy are performing. Investors can’t invest in them directly, but can invest in index funds that track them.
Neither index is inherently better or worse than the other. The main difference between the Nasdaq and Dow Jones relates to which companies (and how many companies) are tracked by them.
As mentioned earlier, the Dow consists of 30 of the largest, publicly traded companies in the US. This includes some big names that most traders will likely recognise.
Meanwhile, the Nasdaq stock exchange has listed more than 3,700 companies. There is a fairly complicated list of requirements that a company must meet in order to be eligible for listing on the Nasdaq stock exchange. Besides a range of earnings and capitalisation minimums, and fees to pay prior to being listed, a few of the main considerations include:
- Companies must have 1.25 million publicly traded shares, already owned by public traders. This cannot include stocks owned by high-ranking employees of the company or anyone who owns 10% or more of the company.
- Usually, the bid price of the stock must be at least $4.00.
- There are shareholder thresholds that a company must hit based on the number of shareholders, how much stock these shareholders own, and their trading volume.
Naturally, there will be some crossover between which companies are listed in the two indexes.
In terms of rebalancing, the Dow Jones Industrial Average rebalances sporadically, in line with significant events such as stock splits or company changes. The Nasdaq Composite Index, on the other hand, undergoes more frequent rebalancing to ensure that it accurately reflects the changing landscape of the market it represents.
Investors can strategically benefit from understanding the weighting of each index. For instance, if a high-profile company like Apple holds a significant weight in the index, its individual performance could sway the overall index movement in a certain direction, compared to a smaller-weighted stock, which might have less of an impact. Understanding this can allow investors to gauge potential market movements, and adjust their strategies accordingly.
Final thoughts
In summary, the Dow and Nasdaq carry distinct implications for investors, with the Dow tracking 30 major US companies, offering exposure to the broader economy, but lacking comprehensive market representation. In contrast, the Nasdaq, functioning as both an exchange and an index, predominantly monitors tech stocks, providing a general indicator of economic performance.
Both indices support popular index funds, facilitating diverse portfolios and serving as relatively low-risk investments for exposure to the wider economy.
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FAQs
- How are the companies included in the Nasdaq and the Dow selected?
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The Nasdaq Composite includes all domestic and international common stock listed on the Nasdaq stock exchange, whereas the Dow hand-picks the 30 companies that will be included. It specifically looks for blue-chip companies across a variety of sectors with excellent reputations and sustained growth.
- Can these indexes be traded?
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No, but they can be replicated in the form of index funds, a type of investment that tracks a market index. Many online trading platforms offer index funds from around the world, from the NSDQ100 and DJ30 to the AUS200, JPN225 and UK100.
- Is their performance judged on the same things?
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No, they are not. Since the Nasdaq is a stock exchange, its performance depends on how all individual stocks listed on the exchange are faring. In the case of the Dow Jones, since it is a market index, its performance is judged on the overall performance of just 30 companies.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.
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