Dow, Nasdaq, S&P 500: What Does It All Mean?

What you need to know about the major market indices.

What You Need to Know About the Major Market Indices

If you've ever listened to the financial news, you know that the Dow, the S&P and the Nasdaq go for a ride every day. They're market indices, and while it's obvious that many people pay attention to them, it may not be so obvious why they do. 

Simply put, a market index lumps a bunch of stocks together into a weighted average. Each index uses a different methodology to choose and weigh stocks, but the general idea is that over time the index's performance serves up a quick overview of the market. Knowing each index's quirks can help you get better at filtering and interpreting the information they offer you. That means you'll be better at putting what you learn into action. 

The three indices used most in the U.S. are the Nasdaq Composite Index, the Dow Jones Industrial Average and the S&P 500 Index. 

The Nasdaq

When money wonks talk about the Nasdaq, they usually mean the Nasdaq Composite Index, which lumps together almost all the stocks that trade on the Nasdaq stock exchange. That makes the index's performance heavily dependent on the tech companies that dominate the exchange. If you're looking for insight on how social media, e-commerce, retail and Silicon Valley trendsetters are faring, the Nasdaq is a good place to get the lowdown. 

Innovation is practically written into the mission statements of many tech companies. This sometimes means they’re smaller, nimbler, and less established. That's why the Nasdaq tends to move around more than the other major indices. If you want to follow a smaller slice of the tech market, the Nasdaq-100® narrows the field to the 100 largest non-financial companies that are listed on the exchange (learn more about the Nasdaq-100 here). 

Dow Jones Industrial Average and the S&P 500

The Dow Jones Industrial Average

The Dow Jones Industrial Average (the Dow, or DJIA) shows up at the top of lots of financial news coverage, which makes it especially easy to confuse it with the market or the economy as a whole. Though in reality, it only tracks the performance of 30 large, U.S.-based companies. 

Because of the companies it tracks, the Dow gives investors a good general idea of what's going on in U.S. markets. 

S&P 500

The S&P 500—founded in 1860, the S&P stands for Standard & Poor’s—often co-stars with the Dow in financial market wrap-ups. This index also tracks big U.S.-based companies, but it uses 500 of them compared to the Dow's 30. As a result, many investors see it as a more complete view of what's happening in the overall U.S. market. 

You can see that after decades of relatively little growth, both indices have tracked generally the same direction over time—which is to say, up. This reflects trends such as the rapid growth U.S. markets experienced following the tech boom of the mid-90s, as well as the dip and recovery around the financial crisis in 2007 and 2008. 

Other Indices Around the World

Some of the other indices don't get much airtime, but are still worth a look. If the S&P 500 isn't broad enough for you, the Wilshire 5000 expands the pool to every stock currently trading in the U.S. If smaller companies are what you're interested in, the Russell 2000 only tracks small-cap stocks. 

• The Hang Seng Global Composite Index covers companies listed on the Hong Kong Stock Exchange. 
• The FTSE 100 (pronounced "footsie") covers the companies with the largest market caps on the London Stock Exchange. 
• The DAX tracks 30 large German companies on the Frankfurt Stock Exchange. 
• The Nikkei 225 has the numbers for Japan's top blue-chip companies. 

Market indices can be great tools for understanding how parts of the market are behaving. Just be sure you understand exactly which part a particular index covers. Then you can use the information it provides wisely.