Difference in the Dow Jones Vs. the NASDAQ

The Dow Jones acts as a broad indicator of the strength of the U.S. economy. Investors can invest in the Dow Jones Industrial Average index just like they invest in similar indices such as the S&P 500 or the Russell 2000. Investors in the DJIA do not buy stock in the individual component companies. NASDAQ serves as a regulated open market that facilitates buying and selling of individual company stock.

The Dow Jones Industrial Average, commonly called the Dow, officially started in 1896 as the brainchild of Charles Dow. Originally 12 companies comprised the Dow index, but today, 30 companies make up the world’s most famous financial index. The Dow serves as an indicator of the overall health of the U.S. financial markets. The 30 companies that make up the Dow range from manufacturing companies to financial services firms and information technology companies. All 30 of these firms trade on the New York Stock Exchange (NYSE). Throughout the trading day, a proprietary formula averages the performance of these 30 stocks to determine the Dow Jones Industrial Average. Of the original 12 companies listed in the Dow, only one remains unchanged: General Electric.

NASDAQ is an acronym for National Association of Securities Dealers Automated Quotations. NASDAQ started in 1971 as a system for securities dealers to receive automated quotations on various small cap stocks. NASDAQ has grown into one of the biggest financial exchanges anywhere. As of June 2010, according to the World Federation of Exchanges the NASDAQ stock exchange has a market capitalization of over $3 trillion, which makes it the third largest stock exchange in the world.

Since all 30 of the Dow stocks trade on the NYSE, it’s reasonable to assume the NYSE has a larger market cap than NASDAQ. Ding, ding and ding--you are correct. As of June 2010, the NYSE has a market cap almost four times greater than the NASDAQ market. According to the World Federation of Exchanges, the NYSE’s market cap sits at $11.794 trillion, making it the largest financial exchange in the world. That is some serious coinage.

Typically the Dow sets the trend for other market indicators. If the Dow is up, that means the market in general is up. That's why you'll see the NASDAQ market follow the Dow's lead. At other times, the NASDAQ market closes higher while the Dow closes lower or vice-versa. Normally, that's because the Dow consists of two-thirds manufacturing companies, while the NASDAQ market has more technology-based and other higher-risk companies. These two market sectors often react differently to the same market dynamics.