Definition and Example of S&P 500, Nasdaq, and the Dow
Charles Dow first developed a stock index in 1894. Two years later, he partnered with Edward Jones to establish the Dow Jones Industrial Average (the "Dow"). At that time, it consisted of a dozen stocks chosen to help trace the movement of the overall market, including the general movement of stocks not included in the index.
Since the Dow was established at the end of the 19th century, it was joined by the S&P 500 and the Nasdaq. These three are the most notable market indexes in the United States.
The Dow tracks the 30 largest U.S. companies. This means it represents large-cap companies like Johnson & Johnson, McDonald's, and Coca-Cola. Although the companies within the Dow represent only about 25% of the total value of all stocks on the New York Stock Exchange, it is widely accepted as a leading indicator of market health.
The S&P 500 tracks 500 large U.S. companies across a span of industries and sectors. The stocks in the S&P 500 represent roughly 75% of all publicly traded stocks. “S&P” stands for the market research firm Standards and Poor’s. Companies can be listed in more than one index, and some of the largest companies in the S&P 500 also are in the Dow.
The Nasdaq composite should not be confused with the Nasdaq Stock Market, which is a trading exchange where people buy stocks, just like they do on the New York Stock Exchange. The Nasdaq Stock Market notably includes large technology companies like Apple and Google, but its listings are not exclusively technology stocks.
The Nasdaq market index, known as the Nasdaq composite, tracks the roughly 3,000 companies that are traded on the Nasdaq Exchange. This is unusual because no other exchange has its own popular index. For example, there is no New York Stock Exchange Composite. The Nasdaq composite has grown popular because it's commonly accepted as a shorthand indicator of how tech-sector and innovative companies, big and small, are faring.
How Do the S&P 500, Nasdaq, and the Dow Work?
Each index works slightly differently.
The 30 stocks included in the Dow change on occasion. The most recent addition was in 2020 when Amgen, Honeywell, and Salesforce joined, and ExxonMobil, Pfizer, and Raytheon exited. In its early days, when it comprised only 12 stocks, the Dow simply averaged the prices of those 12 stocks. The formula was changed over the years to weight higher-priced stocks more heavily than lower-priced stocks.
The S&P 500 also is weighted, using a float-adjusted market cap, meaning that only the value of shares available in the market is calculated.
Nasdaq, like the S&P 500 and the Dow, uses a weighted methodology to calculate its value. It is updated constantly throughout the day, but the value recorded at 4:16 p.m. Eastern Time is the value of record for any given day.
Alternatives to the S&P 500, Nasdaq, and the Dow
While the S&P 500, Nasdaq, and the Dow are the most popular, they are not the only market indexes. Two other commonly tracked indexes include the Wilshire 5000 and the Russell 2000.
The Wilshire 5000 represents up to 5,000 companies of all sizes, from gigantic corporations to the smallest of small companies. It often is called the total market index because of the broad range of stocks included. At least one study has found the Wilshire 5000 to be the best representation of the U.S. market overall. It is younger, though, at it has only been around since 1974 and does not have the same name recognition as the Dow, which dates back to the 19th century.
The Russell 2000 does the opposite of the Dow by tracking only the smallest companies. This index follows 2,000 of the smallest players in the market. If you think that 2,000 companies are too small a sample size, and you’re searching for a larger, more representative snapshot of how small-cap companies are faring, you also can check out its sister index, the Russell 3000.
- Market indexes gauge the overall health of financial markets by tracking select stocks.
- The Dow Jones Industrial Average, the S&P 500, and the Nasdaq composite are the three most prominent indexes in the U.S.
- Additional indexes, such as the Wilshire 5000, the Russell 2000, and the Russell 3000, track different types of stocks.