The Three Stock Indices: Dow Jones, S&P 500, Nasdaq. What is the Difference?

October 23, 2020

By Rahul Iyer

It is important that investors have the ability to assess the health of the market. There are three market indices that investors can use to do this. These are the Dow Jones Industrial Average, the Nasdaq, and the S&P 500. Let us take a look at how these indices work and how they can help investors.

 

The Dow Jones

This is the most followed stock market index. The Dow Jones Industrial Average index is also one of the longest standing indexes in America. 30 large-cap companies are monitored by this index. These companies cover every sector of American business. What makes the Dow so popular is that they have these large companies which effectively represents the economy of the United States. The companies that are tracked by the Dow are household names that Americans know and trust.

 

The S&P 500 

The S&P 500 operated differently from the Dow Jones. They monitor the largest companies that trade on the New York Stock Exchange or Nasdaq Stock Market. They have certain criteria that they follow to qualify the companies that they monitor. The companies that they follow must have a market cap that is above $5 billion. To qualify for the S&P 500, the company must also have at least 50% of its stock on the public market.

This index tracks 500 companies in comparison to the 30 that is followed by the Dow Jones. The S&P covers a larger percentage of the U.S. economy. S&P does not look too closely at the price of the stock, but it focuses on the actual size of the company in the market. 

 

The Nasdaq Composite

The Nasdaq composite is not the same thing as the Nasdaq (NASDAQ:NDAQ), which is similar to the New York Stock Exchange. The Nasdaq Composite is another index that is based on more than 4,000 stocks that are being traded on the Nasdaq Stock Exchange. This proxy is great for checking the health of the technology sector of the market. This is so because most of the companies trading on this exchange are actually technology companies. Similar to the S&P 500, the Nasdaq Composite is weighted by market cap as opposed to pricing.

 

The Sum Up

These market indexes are useful for assessing the health of financial markets. The most prominent indexes in the United States are the Dow Jones Industrial Average, the S&P 500, and the Nasdaq composite. It is important to note that these companies are not the only indexes in America. There is also the Wilshire 5000, the Russell 2000, and the Russell 3000.

Rahul Iyer