Anyone that has ever attempted to invest in one of the larger markets has probably wondered what differentiates between the Dow, Nasdaq, and S&P 500. Fortunately, financial experts frequently put together resources that can help people learn the exact differences between these three. That way, they will be in a much better position to make a profitable investment. So, what type of companies make up each of these three markets and what are some of the most obvious differences between the indices themselves?
Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA) is one of the oldest indices and has been around since the 19th century (1896). Due to this, it is fair to say that it is the most historically relevant of these three. The companies that comprise this market include 30 large brands with some of the largest cap stocks in the world. Examples include Apple, Boeing, Disney, Exxon Mobile, Home Depot, American Express, and many others that are amongst the trendsetters in their perspective industries.
The Dow Jones features companies that are often the flagbearer of their industry. These stocks are considered to be workhorse “blue chip” stocks and often come with a sizeable dividend payout comparative to stocks commonly featured on other exchanges. While these stocks are often representative of historically stable companies, they’re higher than average value does carry a potential risk factor.
Unlike the Dow Jones, the Nasdaq is the polar opposite when it comes to its length of operations. It came around in 1985 which was almost a century after the DJIA. Nevertheless, there are currently about 100 times more companies on this index than on the Dow. In other words, the latest figures indicate that there are approximately 3,000 companies that are listed on the Nasdaq. Additionally, many of the stocks that one can see in the other two indices, the Dow and S&P 500, will be present here as well.
Although one may see the short-lived experience of the Nasdaq as a disadvantage, the overall number of companies more than makes up for it. The reason why is that the risk is so widely spread that one can expect to mitigate potential losses in one sector with gains in another during day-to-day operations. According to a risk management student from Columbia University, Hyounsik Noh, this is much easier to comprehend through a hypothetical scenario. Thus, consider the unlikely situation in which a company like Apple goes out of business. The value of the Dow would take a significant hit, considering the proportion of the index’s value attributed to this one stock. The Nasdaq, on the other hand, only counts Apple as 1 of 3,000 companies so the loss would not be as immediate or as significant. In other words, the Nasdaq is much better for investors who are a little more risk-averse and like to buy shares in companies that may not be as mainstream or viral.
Finally, the S&P 500 could be introduced as a combination of those mentioned above two. First, it was founded between the other indices and dates back to 1962. Its name comes from “Standard and Poor’s” that are represented by the acronym. Additionally, the reason for the number 500 in the name is that the index offers 500 different companies that accumulate a grand total of 505 common stocks eligible for investing. As with the Dow, most of these brands are large-cap stocks and, according to Hyounsik Noh, they cover a whopping 80 percent of the entire market in the nation and amount to $23.5 trillion in total value.
Given the number of investments in the S&P 500, one could say that it is the middle ground between the other two indices as it has many more options than the Dow and quite a few less than the Nasdaq. Thus, daily changes may be a little more visible than they are with the Nasdaq. Nevertheless, it will be a lot slower when it comes to overall drops than the Dow. Additionally, the S&P has been one of the most consistent markets in the entire world as it has reached a mind-boggling 70-percent growth since inception. In the end, investors will generally have to analyze their particular needs, objectives, capital limitations, and tolerance to risk to determine which one of these three markets they should go with.