We’ve all heard about the Dow and the Nasdaq. At times, it’s almost as if the terms are used interchangeably when discussing the economy or stocks. However, these are simply two tools that investors can use to check on the health of the market. Here’s a look at what you need to know about stock market indices — and how they differ:
About stock market indices
Since the stock market is constantly shifting, it can be tough to keep an eye on your investments. Leading stock market indices can help you easily grasp the overall state of the market. According to Caroline Banton, a contributor to Investopedia, there are over 5,000 indices in the U.S. market. The Nasdaq and Dow Jones Industrial Average are among the most prominent of these, and you can use both to understand how your investments are performing, as well as develop your investment strategies.
The Dow Jones Industrial Average
The Dow Jones Industrial Average, created by Charles Dow back in 1896, consists of 30 important stocks, all of which are also featured on the Nasdaq and the New York Stock Exchange. According to Jay Jenkins, a writer for The Motley Fool, there are two main factors that make the Dow such a key part of every investor’s toolkit. First, since it follows so many massive domestic and international companies, it’s a decent indicator of the market’s condition. Second, Jenkins explains the Dow feels more accessible, since it’s comprised of well-known companies, including tech, foodservice, and entertainment giants.
The Dow has its downsides. It takes the value of its stocks and calculates a mean that’s weighted based on the price of each one. Banton explains this means a small shift in a highly valued company can cause a major swing in the overall average. Therefore, she warns it should be interpreted with caution, and shouldn’t be taken as an indicator of how smaller companies are faring.
The Nasdaq, which stands for the National Association of Securities Dealers Automated Quotations, is centered around both domestic and international tech companies. But it doesn’t just focus on social media outlets and online retailers — Banton explains Nasdaq includes industries as diverse as biotechnology, software, and even essential components like semiconductors, along with a smattering of stocks from industries like insurance and transportation. It even includes smaller, speculative companies to round out its offerings. And while the Dow tracks 30 companies, Investopedia explains the Nasdaq considers more than 3,300 different entities in its calculations. Therefore, Jenkins describes the Nasdaq as an appropriate way to monitor the tech market. And unlike the Dow, the Nasdaq isn’t weighted by price. Rather, Jenkins states the Nasdaq weighs stocks based upon the company’s market share. That makes it less volatile than the Dow.
The Dow and Nasdaq are both helpful tools for understanding the health of the market and the strength of the economy. However, if you’re planning to put money into the market, consider consulting an investment expert.