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Dow Jones vs. S&P 500 vs. Nasdaq: A Guide for Future Warren Buffetts
If you’re the kind of person who likes to watch the news, you’re probably more interested in the happenings of the world than the jarbled letters and numbers that tick across your screen.
But you’re probably vaguely familiar with them: DJIA, S&P, Nasdaq: You’ve seen them your entire life, but maybe they’ve never served a purpose to you, so you ignore them and continue watching the nightly news.
Then, when the media reports on the stock market, good or bad, you freak out or rejoice accordingly.
The truth is, you can save yourself a lot of stress and anxiety by actually knowing what those terms mean.
You can stop wondering if your media outlet of choice is sensationalizing the story for click-throughs and ratings and know for yourself how the market is doing.
And you can start by knowing about the major stock indexes.
What Is a Stock Index?
A stock index measures a particular group of companies in the stock market. It’s the average price of the stocks for companies in the index. The media reports on the percentage the index’s stocks collectively rise or fall during the trading day.
An index can measure the biggest companies, smaller companies, most frequently traded, companies headquartered in the U.S., or even the whole dang market.
There are almost 100 indexes used to measure the health of the U.S. stock market, and even more to measure markets around the world.
But you don’t need to know them all; just start with these three.
The Dow Jones Industrial Average (DJIA)
The Dow is the price-weighted average of stocks of 30 of the largest companies in the U.S. These companies aren’t necessarily the 30 highest-priced stocks, but they are among the most well-established and influential companies in the market.
So when news anchors say “the market is up today,” they’re usually referring to the Dow Jones average.
The Dow is one of the oldest and best-known indexes in the world. You may have recently heard that General Electric got booted from the Dow after 111 years in the index. GE was an original member of the Dow in 1896 and remained in the index continuously since 1907.
But two names you won’t see in the Dow are Amazon and Google (or rather, Alphabet, Google’s parent company). The S&P Dow Jones Committee says adding stocks with four-digit share prices would distort the index.
And much like the honey badger, Amazon and Google don’t care. They love their high stock prices, and they’d have to create more shares of stock — called stock splitting, which companies often do to make their stock prices look more affordable — to enter the Dow.
Why is it important? The media may rely on the Dow to gauge the market but with tech companies like Amazon and Google refusing to conform to take a seat at the Dow table, many suggest finding a more diverse index to base your opinions on.
Standard & Poor’s 500 — aka the S&P 500 or just “the S&P” if you’re cool — is the index of the largest 500 companies traded in the market. Those companies are picked by the same people who decide what companies are in the Dow.
This is the index used by financial professionals to gauge the health of the market. It’s updated every 15 seconds during trading hours, so it gives clear, up-to-the-minute trends in the economy.
Like right now, over a quarter of the stock in the index are from technology companies.
The financial sector and health care are second and third, respectively, which is a sobering thought when you think about how your credit card interest and health insurance premiums are helping them get there.
Why is it important? The S&P 500 and the Dow often move in the same direction but the S&P has a more inclusive gauge on the pulse of the market. Keep its six-decade history in mind to help you make personal spending, investing and voting decisions.
P.S. Super investor Warren Buffett bet that a simple S&P 500 index fund could beat the performance of a professionally managed hedge fund over 10 years. That bet won him — and Girls Inc. — $2.2 million.
The Nasdaq Composite includes all of the stocks traded on the Nasdaq Stock Exchange, which is confusing because both the exchange and the index can be referred to as just “the Nasdaq.”
Fun fact: Nasdaq is actually an acronym for the National Association of Securities Dealers Automated Quotations.
The more you know.
The Nasdaq is one of the largest stock exchanges in the world, second only to the New York Stock Exchange (NYSE). The companies that make up the S&P 500 and Dow Jones are traded on both the NYSE and Nasdaq.
There are several differences between the Nasdaq and NYSE which make the composite an index to follow, with the primary one being that Nasdaq is the home of the technology market. Half of the exchange is made up of tech companies, including Apple, Google, Amazon and Microsoft.
Why is it important? The NYSE is your grandmother’s stock market, less volatile and more reliable. The Nasdaq trades tech companies that are growing, innovative and slightly unpredictable. If you want more technology companies in your portfolio, now you know where to find them.
This article contains general information and explains options you may have, but it is not intended to be investment advice or a personal recommendation. We can't personalize articles for our readers, so your situation may vary from the one discussed here. Please seek a licensed professional for tax advice, legal advice, financial planning advice or investment advice.
Jen Smith is a staff writer at The Penny Hoarder. She gives money saving and debt payoff tips on Instagram at @savingwithspunk.
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