Differences between American indices: Dow Jones, Nasdaq, and S&P 500

The Dow Jones Industrial Average, NASDAQ Composite, and Standard & Poor’s 500 are among the most crucial indicators of economic activity and stock market performance in the United States and globally. While they are commonly employed to analyse and forecast market trends, each index possesses distinct features, representing different market segments and reflecting various aspects of the economy.

For investors and market analysts, understanding the differences between these three indices is essential for accurately interpreting stock market dynamics and making well-informed investment decisions.

In this article, we will delve into the specifics of each index, exploring the companies they comprise, how they are calculated, and the economic aspects they represent.

Dow Jones vs Nasdaq vs SP500

These indices hold significant sway in the U.S. economy among the leading global indices, boasting the highest market capitalisation of companies participating in the U.S. stock market. Each index is meticulously composed and employs a specific method for weighing shares.

Three key differences distinguish the Nasdaq Composite, the S&P 500, and the Dow:

  • Firstly, the scope of coverage and sectors included in the index differ. The Nasdaq Composite and S&P 500 encompass a broader array of companies across various sectors compared to the Dow.
  • The second difference refers to the method of assigning weights to individual companies in the index. The Nasdaq Composite and S&P 500 base their component weights on market capitalisation, while the Dow Jones Industrial Average (DJIA) uses the price of each component share to determine its weight in the index.
  • The final distinction lies in the criteria for selecting components of the respective indices. The Dow adopts a more value-oriented approach, utilising a mix of quantitative and qualitative factors to determine whether a specific stock should be included in its index, setting it apart from the other two.

Differences among Dow Jones, Nasdaq, and S&P 500

Dow Jones

The Dow Jones Industrial Average (DJIA), established in 1896 with 12 initial components, holds the distinction of being the oldest among the three indices. With just 30 components, commonly known as the Dow, it boasts the smallest membership. However, due to its synthetic nature, the Dow's coverage is limited because it does not represent all sectors. Notably, it excludes service and transport companies, which are tracked by the Dow Jones Utility Average and the Dow Jones Transportation Average.

Sectors of the Dow Jones Industrial Average (DJIA) index

The Dow Jones Industrial Average (DJIA) comprises companies from diverse sectors of the economy. Key sectors represented in the DJIA include:

  • Industrial: Encompassing companies involved in machinery production, industrial equipment, aerospace, defence, construction, and other durable goods. Notable representatives include General Electric and Boeing.
  • Technology: Encompassing companies engaged in the computer, electronics, telecommunications, and technological services industry. Prominent technology companies in the DJIA include Apple, Microsoft, and Intel.
  • Financial services: This sector includes banks, insurance companies, investment services, and other financial institutions. Recognisable entities such as JPMorgan Chase, Goldman Sachs, and American Express are part of this sector in the DJIA.
  • Healthcare: This sector includes companies engaged in research, development, production and marketing of pharmaceutical products, medical devices and healthcare services. Notable representatives include Johnson & Johnson, Pfizer, and Merck.
  • Discretionary consumer: This sector includes companies that offer non-essential goods and services, such as cars, hotels, restaurants, luxury products and entertainment. The Walt Disney Company, Nike and McDonald's are some of the companies in the discretionary consumer sector represented in the DJIA.
  • Energy: This sector includes companies involved in the exploration, production, refining and distribution of energy, including oil and natural gas. Exxon Mobil and Chevron are some of the energy companies represented in the DJIA.

How is the Dow calculated?

The Dow is a price-weighted and large-cap index, which means that its overall value is determined by the daily price of its component shares. Therefore, a stock with a high price will have a disproportionate impact on the Dow's value. The Dow is considered a blue-chip index because it tracks the performance of renowned companies representing a subset of the American economy.

The selective nature of the Dow's composition makes it less consistently indicative of overall stock market or U.S. economic performance. In bullish markets, investors might shift from established names to burgeoning stocks not reflected in the index. During such periods, the S&P 500, with its broader company inclusion, may record gains surpassing those of the DJIA. On January 4, 2022, the Dow reached a record high, closing at 36,799.65 points.

Prominent components of the Dow Jones include Microsoft Corp, McDonald’s Corp, and Apple Inc.

Main Dow Jones stock indices

The main indices of the Dow Jones are the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA). Here is a brief description of both:

  • Dow Jones Industrial Average (DJIA): One of the most globally recognised and monitored indices, composed of 30 large US companies selected by Dow Jones & Company, a subsidiary of S&P Global. It spans various sectors and industries, including technology, finance, and services. Companies such as General Electric, Microsoft, Apple, Coca-Cola, and Goldman Sachs are part of the DJIA. As a price-weighted index, companies with higher stock prices have a greater impact on its performance.
  • Dow Jones Transportation Average (DJTA): It is an index that measures the performance of 20 transport companies selected by Dow Jones & Company. These companies include air, land and sea transport companies, such as American Airlines, Delta Air Lines, Union Pacific and FedEx. This index is designed to monitor the transport sector and is often viewed as an economic activity indicator, given that transportation is considered a barometer of the economy.

Both indices are used as indicators of the US stock market and are often cited in financial media as a benchmark for assessing the performance of the market as a whole. It is important to note that these indices are susceptible to fluctuations influenced by various factors, including economic, political and financial events both in the United States and internationally.

Nasdaq

Launched in 1971, the Nasdaq Composite Index, with an initial value of 100, includes nearly all companies listed on the Nasdaq stock exchange. One of the primary inclusion criteria for this index is the stock market listing. Comprising over 3,000 stocks as components, the Nasdaq Composite is a capitalisation-weighted index, assigning weights based on the market capitalisation of respective companies.

The performance of the index reflects that of the stock exchange, which in turn is indicative of the performance of the technology sector. This is because the sector represents about 50% of the overall composition of the index. The top 10 companies tracked by the index are technology giants and represent 46% of the overall weight of the index.

The value of the Nasdaq index has increased with the growth of the technology sector. For example, during the dotcom bubble that swept technology stocks at the beginning of the century, the Nasdaq index shot up to 5,046.86 on March 9, 2000. Shortly after, the Nasdaq crashed by over 4,000 points and it took 15 years to reach 5,000 again. The pandemic-induced stock boom has again increased the valuations of the technology sector in 2021 and the value of the index has risen to reach a record high of 16,057.44 on November 19.

Sectors of Nasdaq Composite Index

Nasdaq is renowned for the heavy weighting in technology stocks, but it does contain some other sectors, too. Some of these include:

  • Information technology: Nasdaq is particularly known for its companies in the technology sector. This sector includes companies that deal with software, hardware, technology services, semiconductors, and other related activities. Some of the technology companies represented in the Nasdaq include Apple, Microsoft, Intel, Cisco Systems, Adobe, and Nvidia.
  • Communication services: This sector includes companies that provide telecommunications, media, entertainment, and social media services. Companies like Facebook, Alphabet (Google's parent company), Netflix, Comcast, and T-Mobile US are some of the communication companies represented in the NASDAQ index.
  • Healthcare: Nasdaq hosts numerous healthcare sector companies, including pharmaceutical, biotechnology, and healthcare services companies. Companies like Amgen, Biogen, Gilead Sciences, Moderna, and Vertex Pharmaceuticals are some of the healthcare companies represented in the Nasdaq index.
  • Consumer discretionary: This sector includes companies that offer non-essential goods and services, such as hotels, restaurants, retail, entertainment, and travel. Companies like Amazon, Tesla, Starbucks, Netflix, and Marriott International are some of the discretionary consumer sector companies represented in the Nasdaq.
  • Basic consumer goods: This sector includes companies that produce essential consumer goods, such as food, beverages, personal care products, and household products. Companies like PepsiCo, Kraft Heinz, Monster Beverage, and Procter & Gamble are some of the basic consumer goods companies represented in the NASDAQ.
  • Finance: This sector includes banks, financial services companies, insurance companies, and other financial institutions. Companies like JPMorgan Chase, Bank of America, Citigroup, American Express, and PayPal are some of the financial companies represented in the NASDAQ.

Main Nasdaq stock indices

The main indices of the NASDAQ are the NASDAQ Composite, the NASDAQ-100, and the NASDAQ Biotechnology. Here is a brief description of each of them:

  • NASDAQ Composite: It is an index that represents the overall performance of the NASDAQ stock market. It includes over 3,000 companies, mainly technology companies, but also companies from other sectors such as the healthcare, financial, and industrial sectors. The index is calculated using the market capitalisation of the component companies, which means that companies with a larger market capitalisation will have a greater impact on the index's performance.
  • NASDAQ-100: It is an index that represents the 100 largest non-financial companies listed on the NASDAQ. The index mainly includes technology companies, such as Apple, Microsoft, Amazon, Alphabet (Google's parent company), and Facebook. However, it also includes companies from other sectors such as health, discretionary consumption, and industry. The NASDAQ-100 is also a market capitalisation-weighted index.
  • NASDAQ Biotechnology: It is an index that tracks the performance of companies in the biotechnology sector listed on the NASDAQ stock exchange. It includes companies involved in the research, development, and marketing of biotechnological and pharmaceutical products. The NASDAQ Biotechnology index is also market capitalisation weighted.

These NASDAQ indices are important for evaluating the performance of technology, biotechnology, and other sectors present on the NASDAQ stock market. However, it is important to remember that indices can be subject to fluctuations and can be influenced by various factors, such as market conditions, economic events, and industry trends.

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NASDAQ hosts numerous companies, but it is important to note that the list of components can vary over time. These are the 5 main companies that make up the Nasdaq: Apple Inc. (AAPL), Microsoft Corporation (MSFT), Amazon.com Inc. (AMZN), Alphabet Inc. (GOOGL), Facebook, Inc. (FB), Tesla, Inc. (TSLA).

S&P 500

The S&P 500 represents the top 500 companies on the New York Stock Exchange. Like the Nasdaq Composite, the S&P 500 is an index weighted by the market capitalisation of large-cap securities. Its components represent a diverse set of companies from different sectors.

The list of S&P 500 components can vary over time due to changes in the index. Some of the major companies that are part of it are Apple Inc. (AAPL), Microsoft Corporation (MSFT), Amazon.com Inc. (AMZN), Alphabet Inc. (GOOGL) and Facebook, Inc. (FB).

In 1999, S&P and MSCI developed the Global Industry Classification Standard (GICS), a global company classification system, and created 11 sectors and 69 industries that are represented in the index.

Compared to the Nasdaq Composite and the Dow, the S&P 500 better reflects the market performance across all sectors. The disadvantage of having more sectors included in the index is that the S&P 500 tends to be more volatile than the Dow. Therefore, its gains can be greater on days when the market is doing well and losses stronger when the market crashes.

To be included in the S&P 500, a company must meet certain quantitative criteria. Among these, a market capitalisation of at least 14.6 billion dollars, high liquidity and floating stock equal to at least 10% of the shares in circulation. The S&P 500 reached its all-time high of 4,796.56 on January 3, 2022.

S&P 500 sectors

The S&P 500, a market capitalisation-weighted index, includes companies from various sectors of the economy. Below are the main sectors that make up the S&P 500:

  • Information technology: This sector includes companies involved in the development, production, and distribution of information technology, hardware, software, internet services, and other related services. Some of the companies represented in this sector include Apple, Microsoft, Facebook, Alphabet (Google's parent company), Adobe, and Intel.
  • Communication services: This sector includes companies involved in telecommunications services, media, entertainment, and social media. Companies such as AT&T, Verizon Communications, Comcast, Netflix, Walt Disney, and Twitter (now X) are some of the companies represented in this sector.
  • Healthcare: This sector includes companies involved in the provision of healthcare services, pharmaceutical products, medical equipment, and related services. Johnson & Johnson, Pfizer, Merck, UnitedHealth Group, Abbott Laboratories, and Bristol-Myers Squibb are some of the companies represented in this sector.
  • Finance: This sector includes banks, financial services companies, insurance companies, and other financial institutions. JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Berkshire Hathaway, and Visa are some of the companies represented in this sector.
  • Consumer discretionary: This sector includes companies that offer non-essential goods and services, such as hotels, restaurants, retail, consumer products, and entertainment. Amazon, Home Depot, McDonald's, Nike, Starbucks, and Target are some of the companies represented in this sector.
  • Basic consumer goods: This sector includes companies that produce essential consumer goods, such as food, beverages, personal care products, and household products. Procter & Gamble, Coca-Cola, PepsiCo, Walmart, Colgate-Palmolive, and Kimberly-Clark are some of the companies represented in this sector.
  • Industrial goods: This sector includes companies involved in the production of machinery, industrial equipment, aerospace, defense, construction, and other durable goods. General Electric, Boeing, Honeywell International, 3M, Caterpillar, and United Technologies (now part of Raytheon Technologies) are some of the companies represented in this sector.
  • Energy: This sector includes companies involved in the exploration, production, refining, and distribution of energy, including oil, natural gas, coal, and related services. Exxon Mobil, Chevron, ConocoPhillips, Schlumberger, Kinder Morgan, and Occidental Petroleum are some of the companies represented in this sector.
  • Materials: This sector includes companies involved in the production of basic materials, such as chemicals, metals, construction materials, packaging, and forest products.

What's the difference between Nasdaq and Dow Jones?

The NASDAQ and the Dow Jones Industrial Average (also known as Dow Jones or DJIA) are both important market indices in the United States, but there are some significant differences between the two:

  • Company selection methodology: The NASDAQ is a market capitalisation-weighted index and primarily includes companies listed on the NASDAQ Stock Market. It is known for being heavily oriented towards the technology sector and includes many high-tech companies. On the other hand, the Dow Jones is a price-weighted index, which means that companies with a higher stock price have a greater weight in the index. The Dow Jones is composed of 30 large companies selected from various industries and includes both companies listed on the NASDAQ and the New York Stock Exchange (NYSE).
  • Number of companies included: The NASDAQ includes a much larger number of companies compared to the Dow Jones. The NASDAQ hosts thousands of listed companies, while the Dow Jones only includes 30 companies.
  • Sector composition: Due to their different selection methodologies, the NASDAQ is often associated with the technology sector and high-growth companies, while the Dow Jones is considered a broader index that includes companies from various sectors of the economy. The Dow Jones includes companies from sectors such as industry, finance, healthcare, energy, and more.
  • Company weighting: For NASDAQ, companies are weighted based on market capitalisation, which means that larger companies have a greater weight in the index. In the Dow Jones, however, companies are weighted based on the stock price, which means that companies with higher stock prices have a greater weight. This difference can affect the overall performance of the two indices.

Investing in index ETFs with online brokers

If you want to invest in Dow Jones, S&P 500, or Nasdaq, here is a selection of online brokers:

BrokerMinimum depositFeesMore information
Interactive Brokers£0Over 90 ETFs without transaction feesInteractive Brokers review or Visit the broker
DEGIRO€0.1From €1DEGIRO review
Freedom24£0Variable (depending on account type)Freedom24 review

Read more about investing in indices

Dow Jones, Nasdaq, and S&P 500: conclusion

The Nasdaq Composite, the S&P 500 and the Dow Jones Industrial Average (DJIA or Dow) are three indices used to measure market performance. The Nasdaq Composite and the S&P 500 cover a larger number of sectors and portfolio securities, while the Dow is a blue-chip index of 30 securities.

The Nasdaq Composite Index and the S&P 500 assign weights based on market capitalisation, while the Dow assigns weights based on price. Despite having different inclusion criteria and sector composition, the indices generally move in the same direction. Depending on the economy and the state of the markets, one index may generate higher returns than the others.

For example, in rising markets, the S&P 500 may produce greater gains than the Dow due to the presence of a larger number of sectors and small-cap securities in its portfolio. The opposite happens during downturns when investors move towards the safe haven offered by the securities of established companies with proven business models and dividends.

For those looking to diversify their portfolio, the best stocks of the S&P 500 can offer a wide range of opportunities. This index includes the 500 leading companies listed in the United States, representing a range of sectors from technology to healthcare, and has a reputation for solidity and stability.

On the other hand, the stocks of NASDAQ, known for focusing more on companies in the technology sector, can offer high growth potential, although sometimes at the cost of greater volatility. Finally, buying stocks of the Dow Jones index, which consists of 30 of the largest American companies, can represent an investment in some of the most established and recognised names in the American economy.

FAQs

What does S&P 500 mean?

S&P 500 is the abbreviation for Standard & Poor's 500. It is a market capitalisation-weighted index that represents the performance of a selected group of 500 large companies listed in the United States. The index is managed by Standard & Poor's, one of the leading rating and financial analysis agencies. The S&P 500 is considered one of the main indicators of the general trend of the US stock market and is used as a benchmark to evaluate the performance of investment portfolios and mutual funds.

What influences Nasdaq prices?

The value of the Nasdaq Composite Index is influenced by many factors, including news, macroeconomic factors, market cycle, and investor sentiment.

What is the Dow Jones Sustainability Index?

Dow Jones Sustainability Index evaluates a range of ESG (environmental, social, and governance) factors to identify companies that are leaders in terms of sustainability practices within their industries.

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