Dow Jones, Nasdaq Composite and Nasdaq 100: what each measures

Alongside the S&P 500, three indexes show up in almost every market headline: the Dow Jones Industrial Average, the Nasdaq Composite and the Nasdaq-100. They are all called "the market" at times, yet each measures something different. Knowing how they are built explains why one can rise while another falls on the same day.

The Dow Jones Industrial Average

The Dow was first published in 1896 by Charles Dow and has held 30 companies since 1928. It covers large, well-established US companies, chosen by a committee at S&P Dow Jones Indices. Despite the name, it is no longer limited to industrial firms; its members span many sectors, and it includes both NYSE-listed and Nasdaq-listed stocks.

The distinctive feature is price weighting. The index is the sum of the 30 share prices divided by a number called the divisor. The divisor is adjusted whenever a member splits its shares or the membership changes, so the level does not jump artificially.

Price weighting has odd consequences. A stock with a high share price has a large influence on the Dow, even if the company is not especially large. A company's size in dollars of market value does not matter, only the price per share. After a stock split lowers a stock's price, its influence on the Dow shrinks automatically. With only 30 members, the Dow is also a narrow sample of the market.

The Nasdaq Composite

The Nasdaq Composite began in 1971 with a base value of 100. It includes essentially all the common stocks listed on the Nasdaq Stock Market, which means thousands of companies, including some non-US firms that list there. It excludes things like ETFs and preferred shares.

It is market-cap weighted, so the largest companies dominate. Because the Nasdaq exchange has many technology and growth companies (see NYSE vs Nasdaq), the Composite has historically leaned toward those industries. That makes it more volatile than a broad index in some periods and gives it a different sector tilt from the S&P 500.

The Nasdaq-100

The Nasdaq-100 was launched in 1985. It holds the 100 largest non-financial companies listed on the Nasdaq Stock Market. Banks, insurers and other financial firms are excluded by design. It is market-cap based, but with a modified method that limits the weight of the biggest members under certain rules, so that a few companies cannot completely dominate it. Many popular ETFs track this index.

It is a subset of the Composite, so the two often move in the same direction, but the Nasdaq-100 is far more concentrated in the largest names.

Side-by-side

Example (illustrative numbers)

Suppose that on one day a high-priced Dow member falls 2% while many technology stocks rise.

• In the Dow, a $400 stock moving 2% shifts the sum of prices by $8. A $100 stock moving 2% shifts it by only $2. If the high-priced stock falls $8 while ten lower-priced stocks each rise $0.50 (a total of $5) and the rest are unchanged, the sum of prices falls by $3. The Dow drops even though ten members rose and only one fell.
• In the Nasdaq Composite, the same technology rally lifts the index because those stocks make up a large part of its market value.

On this kind of day, the Dow can be down while the Nasdaq is up. Neither index is wrong. They answer different questions.

How to read them

Treat index moves as a description of what happened to that particular group, not as a verdict on the economy. Comparing several indexes is more informative than relying on one. When they diverge, check which sectors and which very large companies explain the difference. Percentage changes over longer periods matter more than a single day's headline. The method behind weighting is covered in what is a stock index.

Common mistakes and limits

• Calling the Dow "the market." It has only 30 stocks and a price-weighted formula that does not reflect company size.
• Reading the Composite as all technology. It includes many non-tech companies, though its tilt is real.
• Mixing up the Composite and the Nasdaq-100. The Composite has thousands of stocks and includes financials; the Nasdaq-100 has 100 and excludes them.
• Comparing index levels. A level of 40,000 versus 18,000 says nothing about which is better. Compare percentage changes over the same period.
• Forgetting dividends. Headline levels usually exclude dividends.

Where to see it on StocksXray

StocksXray covers the S&P 500 universe rather than these other indexes. You can see which sector a company belongs to on its stock page and browse sector pages such as information technology to look at the stocks behind a headline.

Key takeaways

• The Dow is a price-weighted index of 30 large US companies; high share prices matter more than company size.
• The Nasdaq Composite is a market-cap-weighted index of nearly all Nasdaq-listed common stocks and leans toward technology and growth.
• The Nasdaq-100 holds the 100 largest non-financial Nasdaq companies, using a modified cap-weighting.
• Different construction is why these indexes can disagree on the same day.
• Each is a partial view, so compare several and look at percentage changes, not levels.

This article is educational and is not investment advice.