It’s a question you’ll hear often on 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 S&P 500 or the Nasdaq. But what are these? And what distinguishes one from the other?
What are the Dow Jones, Nasdaq and S&P 500?
Before we dive into the differences between the Dow Jones vs. Nasdaq vs. S&P 500, it’s important to understand the key similarities between the two: In this context, they all refer to market indexes – not stock exchanges. Each of these three major stock indexes tracks a particular subset of stocks, and its movements—day-to-day, month-to-month, and year-to-year—provide a view of how the broader market is performing and investor sentiment.
The Dow Jones industrial average
The Dow Jones Industrial Average – often abbreviated to the Dow – is the best-known and longest-running market index. It has been around since 1896 and consists of 30 leading US-based companies that trade on the New York Stock Exchange or the Nasdaq. Some of the country’s largest publicly traded companies – Apple, Coca-Cola, Home Depot and Nike, to name a few – are included in the Dow Jones.
Although the Dow Jones has great historical significance, its limited scope of just thirty companies and the fact that the index is price-weighted rather than weighted by company value makes it an unreliable barometer of the entire market. When you hear about the Dow Jones, some of these references may be intended to make the day’s movement seem more dramatic. Consider which of these headlines are sure to get more attention: “The Dow Jones fell 390 points today” or “The S&P 500 fell 50 points today.” In both cases the decrease is about 1 percent.
However, there is a time when activity in the Dow Jones makes headlines: when the composition of those thirty 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 that make their way onto the index and a reflection of recent underperformance or loss of relevance for companies that are delisted.
The Nasdaq
At first glance, hearing “the Nasdaq” can be a little 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 certain stocks listed on the Nasdaq stock exchange.
The Nasdaq Composite includes more than 2,500 stocks that trade on Nasdaq, and the Nasdaq 100 includes 100 major non-financial stocks – Starbucks, Netflix, Tesla and PepsiCo, to name a few – that trade on Nasdaq. The Nasdaq indexes are usually cited as a benchmark for the performance of technology stocks, but stocks from several sectors are included in the Nasdaq averages.
The S&P500
The S&P 500 includes 500 major U.S.-based publicly traded companies, including all companies listed on the Dow Jones Industrial Average, regardless of the exchange where their trading takes place. Although this index includes only 500 of the more than 6,000 listed 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 listed companies. in the US, according to S&P Global. The S&P 500 weights companies by their total market capitalization (the stock price multiplied by the number of shares outstanding of each company). 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 includes hundreds of large companies and represents the lion’s share of the 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 mid-cap companies. It’s important to note that the S&P 500 changes more often than the Dow Jones as companies work 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 specifically targeted index funds available, but S&P 500 index funds are an easy way to get a diversified stock portfolio 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 that provide insight into market performance. The Wilshire 5000 is designed to represent the entire U.S. stock market, and the Russell 2000 focuses exclusively on small-cap stocks. While these less established companies generally carry greater risk potential, they also offer what every investor wants: more room to grow and make profits.
In short
The Dow, Nasdaq and S&P 500 are important market indexes. The Dow tracks 30 major US companies, but has limited representation. The Nasdaq indexes, associated with the Nasdaq stock exchange, focus more heavily on technology and other stocks. The S&P 500, with 500 major US companies, offers a more comprehensive market view, weighted by market capitalization. Other indexes, such as the Wilshire 5000 and Russell 2000, cover broader market segments.
