Understanding the Difference Between the Nasdaq and the Dow
The Dow and the Nasdaq are the shortened names of two index products used to track the overall performance of the major Wall Street stock markets. The Dow Jones Industrial Average, more commonly known as the Dow or the DJIA, is the second oldest stock market index on Wall Street, dating back to the late 19th century. The Nasdaq refers to the NASDAQ Composite, which dates back to 1985, and it differs from the Dow in terms of the stocks it tracks.
The Dow is the most often cited benchmark index around the world. Nearly every financial news publication reports on the daily value of the Dow, and that value represents the price of one share for each of the 30 companies it tracks. The Nasdaq tracks all the companies listed on the National Association of Security Dealers Automated Quotation system, which is the second most important stock exchange in the world after the New York Stock Exchange. Since the Nasdaq tracks far more stocks than the Dow, the value is represented in a logarithmic scale for ease of comprehension.
The Big Three of Wall Street
Along with the S&P 500, the Dow and the Nasdaq are considered to provide a pulse of what is happening on Wall Street; they are called the Big Three of the financial world, and they serve as a temperature gauge of the stock market.
Investors, traders, analysts, economists, and policymakers pay close attention to the Big Three because they offer a glimpse into the behavior of market participants. If the Big Three show gains three days in a row, international investors will respond accordingly, thus creating a sense of optimism and driving up the value of foreign stock exchanges in London, Frankfurt, Tokyo, Shanghai, and other major financial centers.
One of the reasons the Dow is more closely followed than the Nasdaq is that its 30 components have come to represent the triumph of companies that focus on passing value onto shareholders. As of August 2018, some of these companies included: Apple, Boeing, ExxonMobil, JPMorgan Chase, Microsoft, Nike, Walmart, the Walt Disney Company, and 22 others. At one point, only stocks traded on the New York Stock Exchange were part of the Dow; these days, they also include companies listed on the Nasdaq. The selection of Dow components is determined by a committee, and these choices become blue chip stocks.
There is an inherently American economic success story built into the Dow, but it is also a story of pure capitalism. Once a stock no longer fits the Dow blue chip criteria, it is replaced; such has been the case with AT&T, AIG and General Electric.
As a composite index, the Nasdaq is heavily represented by technology companies. Microsoft, for example, is listed on both indices. In essence, the Nasdaq represents about half of the stocks that trade on Wall Street; its high technology volume made this index skyrocket during the Dot-Com Bubble period of the late 1990s.
Both Dow and Nasdaq are used by investment banking firms and portfolio managers to offer financial products such as index and exchange-traded funds. Investors looking for an easy way to diversify their portfolios can take advantage of these index-based products since they are easy to acquire, understand and follow.
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