On the surface, the Dow Jones and NASDAQ stock exchanges look the same. They both deal in stocks. You have seen them on the tickers that scroll the bottoms of cable news networks. Financial reports refer to them when discussing the economy. Despite these surface level similarities, the Dow and NASDAQ are two different indices with separate purposes in the financial world. When you and your partner begin investing, it is recommended to know the basics of these indices.
The Dow Jones
The Dow Jones Industrial Average is a stock market index comprised of 30 major companies that are considered high earners and industry leaders. Membership into the DJIA is revolving and companies may be pulled from the index if their earnings and stock prices falter. The DJIA is run by the Wall Street Journal, whose editors choose which companies are in the index. It is the most viewed stock index and is often cited amongst major financial news markets as a barometer for the economy.
The NASDAQ is a stock index that contains around 3,000 companies. A company does not have to be based in the United States to show up on the list. The NASDAQ features mostly technology based corporations including Apple and Google as well as several growth companies.
Calculating the Dow and NASDAQ
The Dow Jones is a price-weighted average index. This means that any type of stock split or adjustment is not counted in the average price. Instead, the Dow uses a formula that weighs the most expensive stocks more heavily than the lower priced stock. This can lead to giant drops if one of the Dow’s companies collapse as AIG did in 2008. When its shares fell from $451 to $54, the market fell 3,000 points. The NASDAQ on the other hand is based on the market capitalization average of the many companies in its index. This means that the value of the index is based on the value of its company’s outstanding stock.
Investing in the Dow and NASDAQ
The Dow is only an index of 30 major companies, all of which can be found on the New York Stock Exchange or NASDAQ. Trading goes through the NYSE and NASDAQ, not the Dow. The Dow’s sole purpose is to give an overall market reading. The NASDAQ on the other hand is both an index and an exchange. The stocks available for trade through the NASDAQ are not found on any other exchange. All trades are done electronically in contrast to the New York Stock Exchange, which performs trade via paper.
- stock market analysis screenshot image by .shock from Fotolia.com