Before we delve straight into analyzing the difference between Dow Jones and Nasdaq, let’s do a quick overview of the history of stock exchanges in the USA. It will be of great help to you if you are interested in US stock investing.
The US stock exchanges have a long history of over 2 centuries.
- The country got its first stock exchange in 1790 with the Philadelphia Stock Exchange.
- Two years after the New York Stock Exchange (NYSE) was established. It is now the biggest stock exchange in the world, with $24.3 trillion in market capitalisation.
Now, the second largest stock exchange is the National Association of Securities Dealers Automated Quotations (Nasdaq). It was founded much later, in 1971 but is the world’s first electronic exchange.
Before it was founded, all the stock exchanges worked manually, where traders and brokers met in person to make transactions. If, however, you see the number of companies listed, it beats NYSE with 3,578 listed companies, whereas the number of listed companies on NYSE is 2,385.
At present, there are 13 functioning exchanges in the US and over 5000 indices. Out of all these indices, Nasdaq and Dow Jones are two very important ones. Let’s take a closer look at these indices to get a better understanding of the US stock market.
What is Nasdaq?
While Nasdaq is a stock exchange, there is also a Nasdaq index called Nasdaq Composite. It is one of the largest indexes in the world, and people commonly refer to it as just Nasdaq. It is made up of some 3000 companies, designed to represent the entire market of the Nasdaq stock exchange.
Even though it mainly consists of tech companies, there are also a few companies from other sectors. Nonetheless, this index is still a good barometer to analyse the overall performance of the tech sector.
To be able to get on this index, the companies must fulfil the following three criteria:
- It must exclusively be listed on the Nasdaq stock exchange. That means if a company has a dual listing on any other exchange, it won’t be eligible to be a part of this index.
- For a stock to be listed on NASDAQ, it has to be a common stock. Stocks like preferential stock or ETFs are not eligible.
- Stocks of limited partnerships, American depository receipts, and Real Estate Investment Trusts are eligible for listing.
There is no requirement for a company to be from the United States to be on this index. It is a market capitalization-weighted index; hence, it is more prone to volatility when the stocks of a bigger company make a move. This index has some of the largest companies in the world. In fact, the top 10 companies of this index account for almost 51% of their performance.
What is Dow Jones?
Commonly known as Dow Jones, it is a popular name for Dow Jones Industrial Average (DJIA) Index. It was founded in 1896 by Charles Dow, Charles Berkstresser and Edward T Jones. Some of its prominent features are:
- Unlike other significant indices, the Dow Jones index is a very concise index consisting of just the 30 most prominent companies in the US stock market. When it was founded, it had only 12 companies on this index.
When we mention prominent, it doesn’t necessarily indicate the largest companies in the country. Instead, these are blue-chip companies that are influential, well-known and have had stable performance. These companies are selected by a committee that omits very large companies because they alone do not represent the actual market conditions of the US stock market.
- DJIA is a price-weighted index and represents about 25% of the US stock market. This means the higher the price of a stock, the higher its weightage on this index.
- It consists of stocks listed on both NYSE and Nasdaq. Investors often refer to this index to trace the overall performance of blue-chip companies.
- The composition of this index includes companies from different industries, with the only exceptions being the transportation and utilities industries.
- Dow Jones index does not change its composition very frequently, and in its life of over a century, it has changed only 60 times.
Nasdaq vs Dow Jones – Key Differences
Let’s take a closer look to understand the difference between Dow Jones and Nasdaq.
|Incorporation||Nasdaq composite index was founded in 1971.||Dow Jones was incorporated in 1896.|
|Trading platform||The Nasdaq index trades only on the Nasdaq stock exchange.||Dow Jones index trades on both NYSE and Nasdaq.|
|Index composition||Nasdaq composite is made up of securities that are registered exclusively on Nasdaq stock exchange. |
If the stock is registered anywhere else, it would not be a part of the Nasdaq index anymore.
|Dow Jones index is made up of the most prominent or best blue-chip companies in the US. |
These companies are primarily well-known companies and pioneers in their industry.
|Methodology||Companies are selected based on the market capitalisation-weighted method.||Companies are selected based on the price weightage average index method. i.e. price per share of the stock.|
|Inclusion of US Stocks||Nasdaq 100 is made up of both US and foreign stocks. The companies do not have to be based in the US to be listed on the index. For example, Indian-origin company Infosys is a part of the index.||Dow Jones consists of stocks exclusively based in the United States. It does include stocks of companies incorporated outside the US.|
|Market capitalisation||The market capitalisation of Nasdaq is $24.78 billion as of 29th July 2023.||The market capitalisation of Dow Jones is $38.86 billion as of 29th July 2023.|
|Industry focus||Nasdaq is a composition of stock from companies of different industries. However, it is heavily focused on the technology sector, which takes up 48.39% of the index.||Dow Jones is a more diverse index without focusing on any specific industry.|
|Industry Excluded||Nasdaq 100 does not allow the inclusion of any financial company on the index. Also, it doesn’t currently have any company from Utilities, Oil & Gas and Basic Material industries as well.||The composition of Dow Jones does not include any companies from the Utility and Transport industry.|
|Rebalancing||Nasdaq is typically rebalanced every quarter. However it can also go under special rebalancing when aggregate weight of companies holding weightage over 4.5% goes above 48%.||Dow Jones is rebalanced after the market closes on the third Friday of the months of March, June, September and December. There is no provision for special rebalancing here.|
|Global influence||The index has a major influence on the entire technology sector, as compared to the entire US economy or the world.||It is made up of some best blue-chip companies from different sectors. Hence, any fluctuation in this index causes a major impact globally.|
|No. of listed companies||The number of listed companies on the Nasdaq is somewhere around 3500 companies.||Dow Jones is a much narrower index with only 30 companies included on the index.|
|Volatility||Technology sector is a constantly changing sector with several disruptive inventions. |
Since the performance of the Nasdaq is highly dependent on the performance of the technology sector, it is more volatile.
|Dow Jones is made up of some very prominent and stable companies on the US stock market from different sectors and with different capitalisations. Hence, it isn’t as volatile as Nasdaq.|
Even though there are several differences between Dow Jones and Nasdaq, they are two of the most important indices in the US stock market. If any investor wants to invest in Nasdaq from India, or even Dow Jones, they will have to find Indian index funds or ETFs that invest in them. Several index funds in India imitate these indices and also other prominent indices of the US stock market, such as S&P 500 or Russel 2000.
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Our team members at Vested may own investments in some of the aforementioned companies/assets. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor’s portfolio. Note that past performance is not indicative of future returns. Investing in the stock market carries risk; the value of your investment can go up, or down, returning less than your original investment. Tax laws are subject to change and may vary depending on your circumstances.
This article is meant to be informative and not to be taken as an investment advice, and may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.
This video is meant to be informative and not to be taken as an investment advice and may contain certain “forward-looking statements” which may be identified by the use of such words as “believe”, “expect”, “anticipate”, “should”, “planned”, “estimated”, “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success of or lack of success of particular investments (and may include such words as “crash” or “collapse”.) All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.