The Dow vs. The Nasdaq: What's the Difference?

The Dow vs. The Nasdaq: An Overview

Both "the Dow" and "the Nasdaq" refer to U.S. stock market indexes: lists of equities from various sectors that investors can track. Both are widely followed and often referenced, so much so that sometimes they become synonymous with the stock market itself or the U.S. economy overall—they aren't exactly, however. Instead, they are theoretical snapshots of the equities market that can provide investors with an idea of how the stock market is performing or how the economy is trending.

The Dow

"The Dow" actually refers to the Dow Jones Industrial Average (DJIA), an important index that many people follow in order to get an indication of how well the overall stock market is performing.

The DJIA is not the same as Dow Jones and Company, a firm that is owned by News Corp. and publishes The Wall Street Journal. Rather, the index is one of many indexes owned by S&P Dow Jones Indices LLC.

The DJIA is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. The DJIA was invented by Charles Dow in 1896. It measures the performance of some of the United States' biggest blue-chip companies. The industrial part of the name is largely historical; very few of the index's component companies have anything to do with heavy industry anymore.

The Nasdaq

The Nasdaq is a term that can refer to two different financial items. The first is the National Association of Securities Dealers Automated Quotations stock exchange: the first electronic exchange that allowed investors to buy and sell stock on a computerized, speedy, and transparent system without the need for a physical trading floor.

The second reference is to an index. Actually, there are several indexes composed of stocks that trade on the Nasdaq; but when you hear people say that "the Nasdaq is up today," they are usually referring to the largest one: the Nasdaq Composite Index, which, like the DJIA, is a statistical measure of a portion of the stock market.

Key Differences

Both the Dow and the Nasdaq, then, are terms that refer to an index, or an average of a great many numbers derived from the price movements of certain stocks; however, they are quite different lists.

The Nasdaq contains all of the companies that trade on the Nasdaq. Most are technology and Internet-related, but there are financial, consumer, biotech, and industrial companies as well. It is often seen as a stand-in for the technology sector and its performance.

In contrast, the DJIA is composed of a mere 30 stocks, mainly of companies found on the New York Stock Exchange, with only a few Nasdaq-listed stocks such as Apple (AAPL), Intel (INTC), Cisco (CSCO), and Microsoft (MSFT).

However, as these names—along with others like The Coca-Cola Company (KO), IBM (IBM), and American Express (AXP)—would suggest, DJIA companies are heavy-hitters in the equities universe and corporate world. Their performance greatly impacts the stock market overall.

Special Considerations

Investors may follow the Dow and Nasdaq, but they cannot literally trade them because they are not investments, but indexes—representations of the performance of a grouping of stocks in the form of a mathematical average.

However, investors can purchase index funds—either mutual funds or exchange-traded funds (ETFs)—that track these indexes. That is, they purchase and hold in their portfolios the equities that comprise the indexes. In this way, their performance basically duplicates that of their benchmark index—minus expense ratios and commissions, of course.

The Bottom Line

Both the Dow and the Nasdaq are stock market indexes that provide insight into the broader economy. While the Nasdaq is also a stock exchange, the Dow is purely a stock market index. The Dow does include stocks on both the NYSE as well as the Nasdaq, whereas any Nasdaq indexes will include only stocks listed on Nasdaq exchanges. Investors can gain exposure to both the Dow and the Nasdaq by investing in index funds that track the indexes.