Now that you’ve decided to get into trading, there is a basic difference you need to understand: the similarities and differences of the Dow and the NASDAQ. While the two may seem similar, they couldn’t be more different. In this post we’ll briefly explain what makes each market index unique. First things first, though: you have to know that Dow companies don’t trade on NASDAQ.
The Dow is just shorthand for the Dow Jones Industrial Average, a stock market index invented in May 1896 by Charles Dow, the founder of the Dow Jones & Co. financial publishing firm (the “Jones” in the Dow Jones Industrial Average is there to commemorate another founder, Edward Jones). The Dow originally encompassed 12 companies, although it stands strong at 30 companies as of late. The 30 Dow companies try to represent the US economy as a whole. Whether or not the Dow goes up or down is dependent on a formula that calculates an average (the Industrial Average from the Dow’s full name) performance of the thirty companies. The Dow trades on the New York Stock Exchange.
Now, What The H*%^ Is The NASDAQ?
NASDAQ is short for the National Association of Securities Dealers Automated Quotations, which began in 1971 in order to receive automated quotes on various small cap stocks (a small cap stock refers to a company with a market capital between $300 million and $2 billion).
However, the NASDAQ trades around $3 trillion dollars today, making it the third largest stock index in the world. The NASDAQ has a tendency to follow the Dow’s lead on booms and busts – not surprising, since the Dow consists of two-thirds of manufacturing companies – but it may sometimes go its own way and end up a little higher or lower than the Dow itself. This is in large part due to the fact that the NASDAQ is based on tech companies, which are more prone to risk, and thereby react differently to market dynamics. We will cover more details about each in later posts, but knowing the basic differences between the two can take a beginning stock trader a long way.