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NASDAQ vs Dow Jones

Difference Between NASDAQ vs Dow Jones

Often, people use words such as ‘the Dow’ and ‘NASDAQ’ in a similar connotation failing to understand that both are different. Dow Jones Industrial Average (DJIA) refers to a stock market index, whereas NASDAQ is an electronic exchange system that stands for the National Association of Securities Dealers Automated Quotients Exchange. NASDAQ also refers to an index. Hence it is used in two different ways, i.e. an exchange and also an index that presents a certain portion of the market. Here we discuss the NASDAQ vs Dow Jones.

NASDAQ

NASDAQ is the largest electronic stock exchange in the world by Market capitalization after the New York Stock Exchange (NYSE) in the USA. NASDAQ was established in 1971 as a successor to Over the counter (OTC) trading. It has the highest trading volume as compared to any other exchange in the world. Because of this highest trading volume, it suffers from volatility as compared to other exchanges.

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NASDAQ Inc. is the owner of an exchange platform. It also owns and operates some stock exchanges in the European markets. NASDAQ Inc. was recognized as a stock exchange by the Securities and Exchange Commission (SEC) in 2006.

Dow Jones

Dow Jones is a financial and business news company. Although the Dow Jones Industrial Average tracks the publicly listed companies Dow Jones itself is not a publicly traded company. It was founded in 1896 by Charles Dow, Edward T. Jones, and Charles Berkstresser. The DJIA is the stock index that tracks 30 large publicly owned companies in the USA traded on NYSE and NASDAQ.

Dow Jones

The above screenshot provides the list of 30 companies on the Dow Jones Industrial Average.

NASDAQ to Dow Jones Ratio

The ratio between NASDAQ vs Dow Jones gives us an interactive chart. A high ratio is an indicator of the fact that the market has gone frenzy and a high bullish sentiment is prevalent. It is also an indicator of the fact that the economy is faring well. Below is the chart from 1977 till the present presenting the ratio of both the indices.

Ratio Chart

These ways of trading on NASDAQ vs Dow Jones are via ETFs and Index Funds. Index Funds are constructed to track a particular index for instance NASDAQ 100 etc. Investing in an index fund is a passive style of investing the returns are maximized by reducing the buying and selling of stocks frequently. It is an efficient method to reduce operating expenses. Since the fund replicates an index hence the need for research analysts and other related expenses is done away with. Even Warren Buffett recommends investing via Index funds and classifies these funds as a safe haven for retirement. He also says that the performance of an average index fund will fare well as compared to the performance of the most active managers.

Head to Head Comparison between NASDAQ vs Dow Jones(Infographics)

Below is the top 4 difference between NASDAQ vs Dow Jones:

NASDAQ vs Dow Jones Infographics

Key Differences between NASDAQ vs Dow Jones

Let us discuss some of the major differences between NASDAQ vs Dow Jones:

  • NASDAQ is a stock index consisting of more than 3000 companies whereas DJIA (Dow Jones Industrial Average) consists of only 30 major companies traded on the NYSE and NASDAQ
  • NASDAQ mainly comprises companies in the technology sector or the companies in the growth stages while Dow Jones is more about the stock price and is hence dependent on the earnings. If the stock price drops, less weight will be given, and the stock may no longer be a part of the index.
  • Volatility in the case of Dow Jones is low because it consists of the top 30 companies by sector and hence these blue-chip companies contribute low volatility whereas, for instance, NASDAQ 100 is more volatile as compared to Dow Jones because of the high risk and growth-oriented companies (the tech giants)
  • The performance of NASDAQ mainly depends on how the technology stocks are faring. Still, in the case of Dow Jones, it is about the 30 companies together and not any company individually.
  • The two indices differ in the way they are calculated. Dow Jones is a price-weighted index indicating that the companies with higher stock prices being given greater weight. The effect of mergers and a stock split is taken into account by addition or subtraction to the index. In the case of NASDAQ, it is based on the average of Market capitalization (Price * Outstanding shares) of the companies on the index.
  • NASDAQ comprises three market tiers, namely:
  1. Global Select Market –The NASDAQ Global Select Market has the highest initial listing standards of any exchange in the world.
  2. Global Market – The NASDAQ Global Market lists companies with overall global leadership and international reach with their products and services
  3. Capital Market – NASDAQ Capital Markets are focused on its core purpose for those companies listed, i.e. capital raising.
  • DJIA is accessible through :
  1. ETFs (Exchange-traded funds)
  2. Futures
  3. Options

NASDAQ vs Dow Jones Comparison Table

Let’s look at the topmost 4 Comparisons between NASDAQ vs Dow Jones.

Basis of Comparison 

NASDAQ

 Dow Jones
What is it? It is an exchange that allows investors and traders to buy and sell securities online without the hassle of physical floor trading. It is an index that gives traders and investors an idea about how the market is faring.
What does it comprise of? It is both an exchange and an index that tracks more than 3500 stocks traded on NASDAQ. It is only an index consisting of the top 30 major companies.
Abbreviation meaning National Association of Securities Dealers Automated Quotients exchange Dow Jones Industrial Average
Can these indexes be traded? No, but can be replicated in the form of index funds that follow such indices. No, but can be replicated in the form of index funds that follow such indices.

Conclusion

NASDAQ vs Dow Jones refers to market indices, but it should be noted that an investor can only buy and sell stocks on NASDAQ since it is an exchange also where the stocks can be bought and sold electronically. Moreover, these indices cannot be traded as they only represent a certain set of stocks based on certain criteria as we looked at in this article (price-weighted and Market capitalization based). The ways of trading are through Exchange-traded funds or index funds.

Recommended Articles

This has been a guide to the top difference between NASDAQ vs Dow Jones. Here we also discuss the NASDAQ vs Dow Jones key differences with infographics and comparison table. You may also have a look at the following articles to learn more.

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  4. NASDAQ vs NYSE
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