The Dow vs. the Nasdaq: What's the Difference?

Because of the way people throw around the phrases "the Dow" and "the Nasdaq," both terms have become synonymous with "the market" or "the economy," giving some people an inaccurate idea of what each term actually means. While both are indexes that investors can track, neither is actually the market or the economy. They are instead, theoretical slices of the market that give investors an idea of how things are going in the market or the economy.

"The Dow" actually refers to the Dow Jones Industrial Average (DJIA), an important index that many people watch to get an indication of how well the overall stock market is performing.

[Important: The Dow, or the DJIA, is not the same as Dow Jones and Company, the firm that is owned by News Corp. and publishes the Wall Street Journal.]

Rather, the gauge is one of many indexes owned by S&P Dow Jones Indices LLC, a joint venture of S&P Global (SPGI), CME Group Inc., and News Corp.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. The DJIA was invented by Charles Dow in 1896. It measures the performance of some the United States' biggest, "blue chip," companies. The industrial part of the name is largely historical; very few of the index's component companies have anything to do with heavy industry anymore.

The Nasdaq is also a term that can refer to two different things: first, it is the National Association of Securities Dealers Automated Quotations exchange, the first electronic exchange that allowed investors to buy and sell stock on a computerized, speedy, and transparent system, without the need for a physical trading floor. The second reference is to an index. When you hear people say that the "the Nasdaq is up today," they are referring to the Nasdaq Composite Index, which, like the DJIA, is a statistical measure of a portion of the market.

Both the Dow and the Nasdaq, then, refer to an index, or an average of a bunch of numbers derived from the price movements of certain stocks. The Nasdaq Composite contains all of the companies that trade on the Nasdaq. Most are technology and internet-related, but there are financial, consumer, biotech, and industrial companies as well. The Nasdaq Composite tracks more than 3,300 stocks. The DJIA is composed mainly of companies found on the New York Stock Exchange, with only a couple of Nasdaq-listed stocks such as Apple (AAPL), Intel (INTC), Cisco (CSCO), and Microsoft (MSFT).

• Both "the Dow" and the "the Nasdaq" refer to market indices.
• Only the Nasdaq also refers to an exchange where investors can buy and sell stock.
• Neither one is "the market" or "the economy."
• An investor cannot trade the Dow or the Nasdaq indexes because they each represent merely a mathematical average.
• Investors can, however, purchase index funds or exchange-traded funds that track these indexes.