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Dow Jones, NASDAQ Composite, and S&P 500 are the three most followed stock indexes in the US. The main difference between them lies in the composition of securities.

The NASDAQ Composite consists of more than 50% of stocks owned by well-established companies in the high-tech sector. The S&P 500 contains 505 stocks of US companies with the largest capitalization. And Dow Jones includes stocks of the 30 largest US corporations.

At their core, the S&P 500, the Nasdaq Composite, and the Dow measure the performance of a collection of stocks. More broadly, they can be indicators of the health of the U.S. stock market and the economy

 

What are the Dow, Nasdaq and S&P 500?

Each of these three major stock indexes tracks a certain subset of stocks, and the movements — day to day, month to month, and year to year — offer a view of how the broader market is performing and the sentiment among investors.

 

The Dow Jones Industrial Average

The Dow Jones Industrial Average is the most well-known and longest-running market index. It’s been around since 1896 and consists of 30 blue-chip, U.S.-based companies that trade either on the New York Stock Exchange or the Nasdaq exchange.

Some of the largest publicly traded companies in the country are included in this index that are: Apple, Coca-Cola, Home Depot, and Nike, to name a few. the Dow is price-weighted. In other words, each company makes up a fraction of the index based on its stock price.

The Dow Jones Industrial Average is listed on the New York Stock Exchange and NASDAQ stock exchange. The main disadvantage of the Dow Jones Industrial Average is that only stock prices are taken into account in the calculation. Thus, if a company has a smaller capitalization, but a more expensive share, it has a stronger influence on the index than a larger company with cheaper shares.

 

Qualifications for the Dow Jones Industrial Index

With limited holdings of only 30 companies, inclusion in the Dow is quite exclusive. In order to even be considered in the first place, companies must meet certain criteria:

• To start, they must be included in the S&P 500.
• Additionally, the Dow’s investments must also fall outside the transportation and utility sectors. Otherwise, they’d be included in the Dow Jones Utility Average (DJUA) or the Dow Jones Transportation Average (DJTA).
• Most importantly, companies in the Dow are typically well-established household names

 

Breakdown of business sectors in Dow Jones Industrial Average

Sr.	Business sector	Share of S&P 500
1	Financials	20.2 %
2	Healthcare	19.3 %
3	Information technology	17.2 %
4	Industrials	14.6 %
5	Consumer discretionary	13.8 %
6	Consumer staples	7.8 %
7	Energy	3.2 %
8	Communication services	2.8 %
9	Material	1.1 %

 

The NASDAQ

The NASDAQ Composite index consists of companies’ shares that are traded on the NASDAQ stock exchange. It includes more than 2,000 US and international companies. More than half of them are from the technology sector.

Unlike the Dow, the Nasdaq is a capitalization-weighted index. That means that larger, more valuable companies have a larger effect on the index’s performance.

The top 10 most influential companies in the NASDAQ Composite Index are:

• Apple
• Microsoft
• Amazon
• Facebook
• Alphabet Class C
• Tesla
• Alphabet Class A
• NVIDIA

 

Qualifications for the Nasdaq Composite Index

The Nasdaq Composite requires its holdings to be listed exclusively on the Nasdaq Stock Market. However, it’ll make exceptions for equities that have been dually listed from before January 1, 2004.

 

Breakdown of business sectors in the Nasdaq Composite

Sr.	Business sector	Share of S&P 500
1	Technology	48.9 %
2	Consumer discretionary	17.2 %
3	Healthcare	10.2 %
4	Industrials	6.2 %
5	Financials	5.2 %
6	Telecommunications	4 %
7	Consumer staples	3.8 %
8	Energy	1.4 %
9	Utilities	1.3 %
10	Real estate	1.2 %
11	Basic materials	0.53 %

 

S&P 500

The S&P 500 was created in 1957 by Standard & Poor’s. It consists of 505 shares of 500 companies that meet the requirements of:

• Minimum capitalization
• Minimum trading volume per month
• Last year’s profit

The S&P 500 includes 500 large, U.S.-based publicly traded companies, including all those listed in the Dow Jones Industrial Average, regardless of the stock exchange that is home to their trading activity.

The S&P 500 is a capitalization weighted index. It represents about 85 percent of the value of all publicly traded companies in the U.S., according to S&P Global. The S&P 500 weights companies by their total market capitalization (the stock price multiplied by the number of each company’s outstanding shares). This formula means that larger companies carry more weight than smaller companies.

Shares of companies included in the S&P 500 are traded on the NYSE and NASDAQ stock exchanges

 

Qualifications for the S&P 500 Index

To be included in the S&P 500, companies must meet a long list of qualifications:

• First of all, they must meet a market capitalization threshold, which was raised to $13.1 billion in June 2021.
• Additionally, 50% of company stock should be available to the public, and it should meet a minimum share price of $1.
• The business must also meet certain regulatory requirements. For example, they must have 50% of fixed assets and revenue in the US.
• They need to file a 10-K annual report.
• Companies must be listed on a reputable stock exchange, such as the NYSE, Investors Exchange, Nasdaq, or BATS Global Markets.

 

Breakdown of business sectors in the S&P 500

Sr.	Business sector	Share of S&P 500
1	Information technology	26.1 %
2	Healthcare	14.2 %
3	Financials	12.9 %
4	Consumer discretionary	10.1 %
5	Industrials	8.7 %
6	Communication services	8.1 %
7	Consumer staples	7.2 %
8	Energy	4.6 %
9	Utilities	2.9 %
10	Materials	2.6 %
11	Real estate	2.6 %

 

How is the Dow Jones, Nasdaq, and S&P 500 Calculated?

The S&P 500 represents the broadest measure of the U.S. economy among the three major indices. The index value is calculated by weighting each company according to its market capitalization and then a divisor, which is set by S&P, is applied to produce the final value. The simple calculation is as such: the sum of the market cap of all stocks included divided by the divisor, or total market cap/divisor.

The Dow Jones Industrial Average, often referred to in short as the ‘Dow’, is the oldest index, dating back to 1896, and is the most globally well-known. The Dow represents 30 large-cap stocks as determined by the Wall Street Journal. Unlike the S&P 500 and the Nasdaq 100, the weighting for each component in the Dow Jones Industrial Average is ranked by share price, and then a divisor is applied to create the final value.

 

What Is the Difference Between Nasdaq, S&P 500 and Dow Jones?

Each index has its own set of instruments based on which it is calculated. Usually, these are securities of a certain sector of the economy or globally significant players. 

 

Size

The number of companies each index holds are:

• Nasdaq has over 2,000 stocks, 
• The S&P 500 has 505
• The Dow Jones Industrial Average has 30. 

Despite their differences in size, the main drawback they share is heavy reliance on large companies.

The Dow Jones, with its 30 companies, is the least diversified of the three stock indices in theory. In practice, the NASDAQ Composite and S&P 500 feature just a bit better diversification.

Calculating the NASDAQ index vs. Dow Jones is based on the capitalization of the companies, so stocks of large corporations have a strong influence. A total of 100 largest businesses make up 90% of the index’s value. The situation is the same with the S&P 500, the companies from the top 10 of the NASDAQ index have the greatest influence on it.

 

Sector diversification

• NASDAQ Composite includes 52% high-tech stocks and 16% consumer stocks. It is a broad-based index and the industry diversification is minimal. 
• In the case of the S&P 500, the division by sector is more diverse: IT – 27%, healthcare – 15%, durable goods, and communications – 11% each. 
• The Dow Jones Industrial Average is the most diversified by industry. The maximum share of the industrial sector is 21%, followed by financial services – at 18%, consumer services – at 17%, and healthcare – at 15%.

Based on the sector diversification, the S&P 500 will be more stable than the NASDAQ composite during the turmoil in any one of the significant sectors. But it will not show rapid growth in case of an economic boom.

The total distribution of the Dow against the S&P 500 is 71% for 5 sectors versus 64% for 4 sectors. Therefore, the response to a boom or crash in one of the industries, in the case of Dow Jones, will be the smallest.

 

Selection criteria

Each company included in the S&P 500 meets the following criteria:

• Market capitalization is ≥ $6 billion
• The monthly trade volume on the exchange is ≥ 250 000 stocks
• Last year’s profit
• Percentage of shares in public circulation > 50%.

The S&P vs. Dow is more dependent on clear quantitative criteria. In particular, the Dow does not have a requirement for a minimum volume of shares traded. The minimum requirements include:

• Reliable business reputation;
• The activity of investors in relation to the company;
• The head office is in the USA.

Companies for Dow Jones are selected from among those included in the S&P 500. As a result, their total market capitalization in the Dow vs. S&P cannot be less than $6 billion. The final decision on the inclusion of shares in the index is made by a special committee of 5 people.

 

Trading differences

Each of these indexes has a unique personality. Due to the differing make-up for each index and the importance of certain companies and groups of companies, each has a different way of trading.

The S&P 500 is the least impacted from day to day by any single stock given it is comprised of so many names. With that said, there are a handful of sectors that have the most importance on the index.

The Dow, on the other hand, having only 30 stocks, is impacted more significantly by the performance of individual stocks. As it stands, the top 10 stocks account for over 50% of the Dow’s value, making it easy to see how it could be more heavily influenced by strong price fluctuations in only a few tickers.

The Nasdaq 100 is broader than the Dow in sheer number of constituents, but the impact of a smaller group of stocks is even more pronounced. The top 10 stocks in the Nasdaq 100 account for over 50% of the index, leaving 90% of the index to account for less than half of the index’s value. This makes the index top-heavy and highly sensitive to price swings in a select few stocks.

 

Volatility differences

The Dow Jones is typically the least volatile of the three major indices as many components are slower-moving, blue-chip companies.

The Nasdaq 100 is the most volatile of the three largely because of its high concentration in riskier, high-growth companies such as Facebook, Amazon, and Alphabet (Google). 

Volatility in the S&P 500 is typically somewhere between the two, neither too low nor too high.

 

Price trends compared

The performance of all three stock market indices is highly dependent on several large companies that participate in the Dow Jones, NASDAQ, and S&P 500. For example, Apple, Intel, Microsoft, and so on. As a consequence, these three indexes often rise and fall at the same time.

The below chart shows the comparison of the three indexes over the past two years:

All of the indexes follow a similar trend. After hitting the peak in early 2022, all the indexes declined. This declining trend continued throughout the year. The trend reversed when the year 2023 started and the indexes started to rise.

 

Alternatives to the S&P 500, Nasdaq Composite, and Dow?

The S&P 500, the Nasdaq Composite, and the Dow are well-established stock indexes. However, there are other indexes listed on Wall Street that are also very popular and regularly followed by a good portion of the population. These indexes include:

• S&P MidCap 400 (midsize companies)
• Nasdaq 100 (largest non-financial companies listed on Nasdaq)
• Dow Jones Transportation Average (transportation companies)
• NYSE Composite (common stock of all companies listed on the New York Stock Exchange)
• Russell 1000 (large-cap companies)
• Barron’s 400 (highly rated U.S. stocks based on factors such as growth, value, and profitability)

 

Which Is the Best Investment?

Each index caters to a different set of investors:

• Dow Jones will suit investors with a conservative strategy. A benefit of the DJIA is its orientation to profitable companies, resilient to crisis. 
• Investments in the NASDAQ are associated with high risks and greater potential profit targets as it is focused on companies within the same industry of more than 50%. It is both an advantage and a flaw at the same time.
• The S&P 500 is the most diversified and average option. During the global growth of the total stock market, investors and traders are attracted by companies with low-cost shares and relatively low capitalization included in the index. However, those same investors may accelerate the decline of the index by selling such assets to buy the blue chips of the Dow Jones.

The Dow, the Nasdaq, and the S&P 500 are a part of the US stock market. However, there are significant differences among the three. When choosing which index is a good choice to follow, it’s important to weigh its pros and cons.

Some investors might prefer the price-weighted structure of the Dow. Whereas, others may prefer the stability of its blue-chip holdings.

Similarly, some traders might choose to follow the S&P 500 and the Nasdaq because of their attractive diversified investments. But it’s important to note these two indexes are skewed more heavily toward high-value companies, particularly those in the tech sector. As a result, these indexes might not be a good indicator of the health of the US economy as a whole.

But the good news is investors do not have to choose just one. They can choose all if they want. In fact, this is a much better and less risky approach. By investing in multiple indexes, traders can diversify their portfolios by dedicating a fraction of their money to each index.

Investing in a large, well-known stock market index is less risky than stocks, metals, and currencies. The stocks that make up the index balance each other. Therefore, both ups and downs will be smoother. Large companies whose shares play the main role in the indices do not feature impulsive price changes.

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