the difference between the Dow, Nasdaq, and S&P 500.
In: Economics
They are different stock market indexes:
Dow – made up of 30 large “industrial” companies that are supposed to represent a cross section of the economy. it is not weighted based on company’s market cap (overall value of company)
NASDAQ – is an index of the companies specifically traded on the NASDAQ stock exchage (heavily skewed toward tech and biotech)
S&P 500 – is an index comprised of the 500 largest companies. Is weighted based on market cap, so largest companies have much greater influence (I think largest 5 companies are now like 1/4 of total weighting of index)
The Dow Jones industrial average is 30 large stocks that represent major industries on different stock exchanges. These are big hitters like Apple and Boeing. This shows people how the big steady stocks are doing across sectors.
S&P 500 is much the same, but tracks 500 of the biggest companies.
Nasdaq and New York Stock Exchange are stock exchanges. Nasdaq is generally more technical. This is the organization stocks are listed on for trade. There is also the Nasdaq Composite which is an index of 3000 stocks, much like the S&P500
There are any number of variations and numbers of stocks watched. Russel 3000 index for example and indexes for different sectors like transportation or energy or consumable goods.
Edit for 5YOs with context because apparently I don’t know how to talk to [5YOs](https://old.reddit.com/r/explainlikeimfive/comments/ifxvet/eli5_the_difference_between_the_dow_nasdaq_and_sp/g2rgrcu/)
There are lots and lots of companies in the world that are publicly traded. Some big, some small, some in all sorts of different industries and markets. So many that it can be hard to get a good gauge on the overall health and trends of different sectors. Theres just too much varied stuff to look at. So, to fix this we sometimes take some companies with similar attributes and lump them into a pile together, and then just focus on that set of companies to make it easier to see what the trends are, without the pollution of the riff-raff. These are called “indexes”.
So, these are different lumps of companies from different markets and different sectors meant to represent their particular group. The S&P 500 is a block of 500 different large companies that were chosen to represent the market as a whole. The Dow is the same way, but with fewer companies, which makes it more susceptible to variations in a single company rocking the whole boat.
There are lots of indexes that lump companies into lots of different categories for people who want to see different things. JETS is an index that lumps together aviation/airline stocks, for instance, so you can see the trends of just that sector.
ELI5: each one is a market representing a slice of america’s business. the Dow is industry, The S&P500 is a general overview that looks at most sectors fairly evenly, and the Nasdaq looks mostly at technology companies.
There are also indexes that specifically track: Small companies, banks, transportation, microchips—you name it.
A lot of people here have offered great responses.
TLDR: They’re just different metrics of the stock market. You can’t buy them directly. People use other instruments to make bets on these metrics.
The Dow, Nasdaq, Vix etc are referred to as an “index”. They’re not financial assets: literally just a numerical calculation. For example:
Rank stocks by market cap and average closing price for top 500 stocks.
It’s just a metric of what’s going on in the stock market. Investors make bets on them but they do not buy the index because the index is just a number. Hedge funds can call up a bank and describe whatever bet they want.
Hedge Fund: “If the index hits x before y I get $10.”
Traders/quants use a variety of methods to come up with a price they’re willing to trade at.
Market Maker: “I’m $3 at $5”
Means I’ll buy for $3 and sell for $5. This is called “market making”, a service typically provided by investment banks. They’re analogous to a casino. They take an edge and always win (unless they blow up). These bets are commonly referred to as “derivatives”. Examples include futures contracts, puts/calls, swaps and exotics
Dow, NASDAQ, and S&P 500 are the three most widely cited stock market indices. Each is comprised of a different basket of securities, representing a slightly different cross-section of the economy.
The DOW, also called the Dow Jones Industrial Average or DJIA, is a group of 30 stocks and the index is an equal-weighted average of the underlying 30 stock prices. The DOW is the oldest of the three major “averages” and is skewed towards industrial, manufacturing stalwarts including but not limited to companies like Apple, Boeing, and General Electric. The companies that form the DOW generally employ a lot of US workers and the index is thus a barometer of economic health.
The NASDAQ, also referred to as the NASDAQ 100 or “The Qs”, is a group of 100 mostly technology stocks and is also itself a stock exchange, its competitor being the NYSE. This index was formed by the exchange to monitor securities that account for most of its trading volume. Much of the NASDQ is formed by tech giants like Amazon, Microsoft, Apple, Facebook and Netflix among other companies that aren’t even technology companies (many would be surprised to learn that Monster Energy is a constituent of the NASDAQ). Nasdaq companies are more representative of Silicon Valley.
Finally, the S&P 500 or Standard and Poor’s 500 is perhaps the most important of the three indices. It is an index that dates back to the early 80’s and includes roughly the 500 largest US based companies on a market cap weighted basis. Inclusion into the S&P 500 requires a company meet several conditions not limited to positive earnings and revenue growth over the trailing twelve months. The S&P as it’s called represents the largest swath of the US economy.
There is a quite a bit of overlap between the three indexes (For example, Apple is in all three, AAPL) and there are various financial instruments like ETFs(exchange traded funds), options, futures contracts, and futures options that are used to speculate on the prices of these indexes in financial markets.
Dow and S&P 500 are indexes comprised of 30 and 500 companies respectively. The news still reports the Dow but it is basically ignored by professional financial services people. NASDAQ is an exchange where stocks are traded.
Since others have already commented on WHAT the three indexes are, I will comment on how you look at these (and others) and get a snapshot of “what is going on”. I’ll use an example of apples and orchards to illustrate stocks and markets.
The DOW is the most well known. Why? It’s the oldest. It’s 30 stocks that are intended to be representative of the stock market.
Professionals don’t use it much. Why? Well a few reasons: at 30 stocks you get don’t an idea of the broad market. It’s like picking 30 trees in an orchard to represent the whole orchard. If one tree is giving more bad apples it skews your understanding of the whole orchard, a lot more than say if you picked 500 trees and looked at all their apples. You might say – wow a lot of apples are going rotten. It might just be that one tree but it’s 1 out of 30 instead of 1 out of 500.
For the most part, it works. But if someone is always commenting on the Dow, odds are they’re pretty novice or just casual investor.
S&P 500 is basically like taking the 500 largest trees in your orchard. These are hardy and not likely to just succumb to small ebbs and flows of pests and health and such, so you can get a really nice feel for the health of your orchard. Unlike the Dow, you get a much bigger slice of your orchard – 500 trees instead of 30! So you have less chance of having a really skewed understanding based on one bad tree. Also, this only tells you what is happening with big trees in your orchard. It doesn’t tell you what is happening to apples around the world (maybe there’s a new pest abroad or some disease to Apple trees – you wouldn’t know that only looking in your orchard).
The S&P 500 tells you what large stocks are doing in the US market. It does not tell you much about everything else (small, mid, large, specific sectors, anything in any other country, bonds – you get the idea. Only stocks. Only big ones. Only the US).
Professionals look at a variety of indexes to get a “feel” for what’s going on – but if they had to pick one, the S&P 500 could be a worthy candidate.
NASDAQ is a bit different. It has both big trees and little trees. It’s kind of like tracking all the varieties of apple trees that came from one nursery. This NASDAQ nursery happens to sell a bit more fast growing Galas and Pink Lady’s. It doesn’t sell many Fuji’s. These trees grow quickly and have a beautiful bounty, but sometimes they die before they get to that point. But in your orchard it also kind of represents the broad orchard. With a slight more detail on those Galas and Pink Lady’s. So if those have more pronounced results during harvest, you’re going to see that more.
The NASDAQ holds large and small US stocks. It tends to be more exposed to Technology and Consumer discretionary sectors. It has negligible representation of the financial sector.
If you look at the NASDAQ, you kind of think – this is broad market looks like if I’m really wanting more detail on tech.
So as a summary, you see these are just ways of measuring things. If you follow them you can see trends to get an idea of what different parts or the market are doing. There are other indexes you can follow that will give you a better idea on other parts of the market.
Want a good representation of your WHOLE orchard? Take a look at the Russell 3000. Not 30, not 500 – 3000 trees! That’s basically the whole orchard.
Maybe you just want to know how your smaller trees are faring because you happen to have a lot of small trees and want to know if it’s a good time to plant more. Now these are smaller so there’s more of them. They’re also young, so the good ones will grow and some just won’t make it. The growth happens quickly and so does the disease. You have to rotate your trees a lot because these go in and out. If you want to track these more numerous, smaller trees? Well you should look at the Russell 2000.
Maybe you want to track the transition between small and large – and just look at those medium sized trees to get an idea how things are growing after they’ve gotten established, but not quite so big that they are super-hardy and impervious to decay (for the most part). Look at the S&P 400. Mid-cap companies.
Further, if you want to truly understand how apples are growing around the world, and be a great Apple farmer you should not only look at your orchard. Look at what’s happening around the world. Many farmers have gone through what you have, maybe somethings coming – good or bad – you can get a better idea of the bit world or apples this way. Check out (mostly) European apples (EAFE) or apples growing in up-and-coming agricultural areas abroad (Emerging Markets).
So you look at all these. So what?
Well, you’ll find sometimes everything looks the same. And sometimes everything looks different. That unfortunate pest you and all your farmer friends have been lamenting? Well it turns out our European friends are just getting over it. Maybe light at the end of the tunnel. Better buy more trees while they’re cheap since nobody’s buying.
Sometimes the S&P 500 makes everything look really good. Oh look all my apples are doing great! Then you look at the Russell 2000 and realize smaller trees are REALLY struggling. Hmm. Let me hold off on planting those and wait to do some soil tests before I waste more money on these dying small trees.
Or maybe it’s summer and those fast growing NASDAQ seeds are really doing well! Well your hardy trees are struggling. If you only looked at the big trees (S&P 500) you might have missed an opportunity!!
The more you know the better decision you might make with that better vision of each kind of tree group you’re looking at. In the end each harvest is unpredictable but at least you can be more educated so you can make adjustments more quickly (or even avoid overreacting) with that extra knowledge
Each one is a separate shop that carries different kinds of products.
S&P only carries the best products that are worth the most.
NASDAQ is for techies.
DOW is like a heavy duty Home Depot, it’s “industrial”
But it’s like a sampling of the top performers from many industries.
Dow looks at the top 30 Pokémon. S&P looks at the top 500 Pokémon. NASDAQ is where Pokémon are traded.
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