It can be overwhelming when talking heads on CNBC or your friends in the financial industry start tossing around jargon like NASDAQ, DOW, and S&P 500. Sure, you’ve probably heard of these terms, but do you know what they actually mean and can you hold your own in a conversation instead of nodding your head with the fear of being sold out for not knowing what they are? As always, TPC has got you: here’s what you need to know about the NASDAQ, DOW, and S&P 500 – so the next time you’re at the water cooler, you’ll be able to chime in.
These three indexes give us a picture of the overall stock market and where it’s headed by tracking top stocks in that market. Because they have the same basic framework, many people believe they’re interchangeable. However, the truth is that the NASDAQ, DOW, and S&P 500 each have a different process to track the market, and as a result, will swing up and down at different rates.
DOW – The Dow Jones Industrial Average is the oldest and most famous index in the world. Charles Dow created the first stock index in 1894 and two years later, he and Edward Jones created the DOW. The DOW represents the 30 largest companies in the United States. While it’s significantly impacted by the performance of individual stocks, it’s usually the least volatile of the three due to the size of the companies it tracks. Unlike the NASDAQ and S&P 500, the DOW weighs each component by share price compared to Market Capitalization. Market cap, is the total value of all the stocks the company has currently issued. The companies tracked by the DOW account for about 25% of the value of all stocks on the New York Stock Exchange, but many believe it’s the leading indicator of the health of the stock market.
S&P 500 – In 1957, market research firm Standard & Poor created this index. It has the broadest measure of the three, tracking 500 large US companies across many different sectors. It represents about 75% of all publicly traded stocks and the index value is calculated by weighing market caps. To be chosen for the S&P 500 index, a company must have a market cap of $8.2 billion or more, have a public float of at least 50%, have adequate liquidity and have positive earnings for the last four quarters. Because it tracks so many companies, this index is the least affected by day-to-day happenings of any single stock.
NASDAQ – Started in 1985, the NASDAQ is the youngest of the three indexes and is based on market caps. It is a technology index that tracks about 3,000 of the largest non-financial companies traded on the NASDAQ Exchange. The NASDAQ is unique in that all trading occurs via computer transactions. Of the three major indexes, the NASDAQ is the most sensitive to price swings because the top 10 stocks represent more than 50% of the index.
All of the major indexes help to measure the strength of the economy, but do so differently. While some companies may only trade on one index, it is not uncommon for some of the largest companies, such as Apple or Amazon, to trade on multiple indexes. In short, the DOW is a reflection of how the most dominant companies are performing, the S&P 500 provides information about a more diverse range of smaller companies, and the NASDAQ is particularly helpful when dealing with tech stocks.
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