DIFFERENCE BETWEEN THE DOW AND NASDAQ
Stock market indices are used by investors as an investment tool and intended to serve as an indicator of market trends. They are also used as benchmarks to judge performance of fund managers. Two popular indices which are referred to most frequently by investors all over the world are the Dow Jones Industrial Average (DJIA) or the Dow, in short, and the Nasdaq Composite Index.
Before analyzing the major differences between the Dow and the Nasdaq, a brief history of the indices would be in order.
Dow Jones Industrial Average was officially launched in 1896. Over a period of time several indexes were added to track stocks, bonds, hedge funds, commodities, real estate besides multi-asset class portfolios. As on May 31, 2010 the DJIA’s total market capitalization amounted to $ 3343.7 billion.
The Nasdaq Composite Index was launched in 1971. It comprises all Nasdaq-listed US stocks and international stocks listed on the Nasdaq. The index includes more than 3000 securities.
The DJIA represents 30 large and reputed US companies covering the entire industrial spectrum, except transportation and utilities. The Nasdaq Composite, however, is a broad-based index covering more than 3000 securities listed on the Nasdaq stock exchange.
The weight of components in the Dow is price-based. In other words, a corporate action like a stock split which changes the price of a stock would impact the Dow rather than the Nasdaq index. On the other hand, the weights assigned to Nasdaq components are based on their market capitalization.
The Dow represents US industrial stocks only. The Nasdaq index, however, represents all Nasdaq-listed stocks which include US and non-US stocks which comply with its eligibility criteria.
Just as the Dow has a preponderance of industrial stocks but is short on information technology, the Nasdaq’s bias is unquestionably on technology stocks. In fact, technology stocks account for nearly 47% of the Nasdaq Composite index. It is for this bias that both the Dow and the Nasdaq serve a limited purpose.
The most important difference between the two indices is their history. By virtue of its longer presence, the Dow stands out as the index to fall back upon whether you are an investor, an analyst, a fund manager or a trader. The perspective that the Dow provides cannot be matched by any other stock index.
Despite its obvious shortcomings, the value of the Dow lies in its insights into major market boom and bust cycles. If you want to know why or how the market crash of 2008 was different from the Great Depression of 1929, you are sure to get some clues by digging into the history of the Dow. It is for this reason that the Dow remains till this day the grand daddy of all stock market indices.