In our previous articles, we wrote about Dow Jones, S&P500, and Nasdaq. Let us define indices.
What is Dow Jones?
Dow Jones or Dow or DIJA represents a stock index of 30 blue-chip industrial and financial companies in the United States. The Dow Jones index is price-weighted and does not account for changes in market capitalization. Dow Jones & Co. was founded in 1882 by Charles Dow, Edward Jones, and Charles Bergstresser.
What is Dow Jones today?
Dow Jones industrial average index real-time
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What is Nasdaq?
Nasdaq or National Association of Securities Dealers Automated represents an electronic exchange for buying and selling securities managed by Financial Industry Regulatory Authority (FINRA). The Nasdaq Composite is a stock market capitalization-weighted index that consists of the stocks that are listed on the Nasdaq stock exchange.
What’s the difference between the Dow Jones and the Nasdaq?
Dow Jones Industrial Average consists of 30 major companies traded on the NYSE, while the NASDAQ index has more than 3000 companies. Dow index is based on average price calculation where the stock split is not considered. In contrast, NASDAQ is based on the average Market capitalization (Price * Outstanding shares) of the companies index. The NASDAQ stock market depends largely on the technology sector’s performance, while Dow’s performance is focused on the 30 major companies as a group and not as individual stocks.
What is S&P 500?
The Standard & Poor’s 500 or S&P 500 or S&P or SPX represents a weighted stock market index comprising the 500 largest companies by market capitalization listed on the New York Stock Exchange (NYSE) Nasdaq. Founded in 1957, S&P 500 represents the strength of the US economy.
S&P 500 chart and current price
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Difference Between Dow Jones S&P 500 and Nasdaq
The difference between dow Nasdaq and S&P is:
- S&P 500Â index comprises 500 largest companies by market capitalization listed on the New York Stock Exchange (NYSE) Nasdaq. Dow Jones Industrial Average consists of 30 major companies traded on the NYSE, while the NASDAQ index has more than 3000 companies.
- S&P 500Â index is created based on market capitalization, while the Dow index is based on average price calculation where the stock split is not considered. In contrast, NASDAQ is based on the average Market capitalization (Price * Outstanding shares) of the companies index.
Three significant indexes are most renowned because of their extensive usage by the U.S market traders, namely the Dow Jones Industrial Average, Nasdaq 100, and S&P 500. All these three indices are almost similar because they track the impact of the same business cycle and macroeconomic factors on different companies. There also happens to be a crossover between the stock which is a part of all three of these indices. However, other than a few similarities, there are also significant difference=ces between the Dow Jones Industrial Average, Nasdaq 100, and S&P 500, which includes how the index values are computed in each of them and the number and type of stock they constitute. One way to understand the difference among these indices is to learn how they are all calculated.Â
Dow Jones Industrial Average, Nasdaq 100, and S&P 500:
Let us learn how to calculate these indices step by step:Â
Dow Jones Industrial Average: Also known as Dow, Dow Jones Industrial Averagex in play since 1896, making it very well known globally. As given by the Wall Street Journal, 30 large caps are constituted by the Dow Jones. Under this index, the weighting of every component happens to rank based on share price, followed by a divisor being used for creating the final value.Â
Nasdaq 100: Nasdaq 100 is the newest of all these three indices, which started in 1985. Also referred to as the technology index on account of heavy weighting provided to tech-based companies, Nasdaq 100 stands for the biggest non-financial companies on the Nasdaq exchange list. The major determiner under this index is the market capitalization of its constituents.Â
S&P 500: Originated by the Standard & Poor’s back in 1962, this indicator accounts for the broadest measure present in the U.S economy among all the three indices. The process of the computing index value is to weigh every company as per the market capitalization followed by the final value being produced based on the divisor set up by S&P.Â
Having understood the difference in calculation of the three indices, we can now go ahead to study the trading difference between the three.Â
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Even though all these indexes share similar characteristics, there happens to be a significant difference in how they trade based on the construction of each index and the importance held by varied companies and sectors. To understand this better, we can take the example of S&P, which is hardly affected by the index since it comprises so many companies against other indices, which might entirely depend on the indexes.Â
Over a different period, we have constantly witnessed the varying performances of different sectors. As an example, let us consider how the oil sector occupied a major stake in the 1970s which shifted to the technology sector in the 2000s, Financials till 2008, and finally has been taken over by the information Technology sector in the present times.Â
On the other hand, the indices Dow experiences a significant change based on individual stock performance since it constitutes only 30 stocks. Almost 50% of Dow’s value is constituted by the top 10 stocks, which points how it can significantly impact the index if there happens to be any fluctuation in prices.Â
Moving on to the Nasdaq 100, we can on=bserve that even though it is broader than Dow, considering the number of constituents, it can still have a grave impact based on a small group of stocks. Almost 50% of the index of Nasdaq 100 is constituted by the top 10 stocks, which leave 90% considerable for lower than half of the index value. Therefore, even small alterations in a few stocks can major impact the index.Â
The best time to observe the disparity among the weightings of indices is at the time of earning seasons since that is the time when there are major price swings on account of the companies putting forth their results.Â
Lastly, we would like to throw some light on the basic differences between all three indices regarding the breakdown of weightings.Â
The Distinction Between Dow Jones, Nasdaq, and S&P 500 Based on the Breakdown of Weightings
The distinction in volatility: Of all the three indices, Dow Jones happens to be the least volatile since it constitutes slower-moving components that include blue-chip companies like Boeing Company, 3M Company, and United Healthcare. While, on the other hand, Nasdaq 100 is the most volatile among the three due to its high concentration of riskier high-growth companies, including Facebook, Amazon, and Google. In the S&P 500, volatility is in the middle of the two.Â
Including the different indices to form a trading strategy: Indices can be considered close to assets in the markets. Hence, various tools such as fundamental and technical analysis are used to conclude. The use of these tools varies based on the term of trade. For long-term trade investors, the focus rests mainly on fundamental analysis, while for short and intermediate-term traders, the focus rests on technical analysis. There is a general reading about which the volatility is higher when uncertainty is looming in the market. There is lower volatility when the prices in the market are rising, and it is functioning more predictably. The volatility changes can be tracked by using the CBOE Volatility Index, which is also known as the fear gauge, pointing towards the role of fear in this index. This can also make short-term trading fruitful by providing many opportunities to short-term traders looking for volatility.Â
The role of market direction in volatility: Specifically for the day traders and swing traders who consider short-term price fluctuations, exchange hours are another major characteristic distinguishing the indices from other market assets. The exchange hours play a huge role that fixes the exact hours when there are the most liquid to trade every day. The participation, therefore, is very bleak outside of the exchange hours.Â
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
