Nasdaq vs. S&P 500 vs. the Dow: How Each Index Is Built

What 'the Nasdaq' refers to

When the news says the Nasdaq rose, it usually means an index, but Nasdaq is first of all the name of an exchange where stocks trade. And more than one index carries that exchange's name. The Nasdaq Composite holds most of the stocks listed on the Nasdaq exchange, while the Nasdaq-100 takes only the 100 largest companies among them, excluding financials. The two usually move in a similar direction, but they differ in size and makeup, so their daily changes are not the same. When you look at a chart, check which one is on screen first to avoid a mismatched comparison. This guide is not about reading a stock against an index; it focuses on the rules that build the indexes themselves.

How the S&P 500 is built

The S&P 500 has been calculated in its 500-stock form since 1957 and is the most widely used benchmark for the US large-cap market as a whole. Despite the name, it does not simply take the top 500 companies by market value.

• An index committee adds and removes companies using criteria such as size, enough trading activity and profitability
• It does not care which exchange a company lists on, whether the New York Stock Exchange or Nasdaq
• Weights are based on float-adjusted market cap, counting only shares actually available to trade
• Some companies have two share classes, so the number of constituents can be slightly above 500

The Nasdaq Composite and the Nasdaq-100

The Nasdaq Composite started at 100 in 1971 and holds nearly all common stocks listed on the Nasdaq exchange. It runs to thousands of names and includes companies from outside the US if they list on Nasdaq. The Nasdaq-100 began in 1985 and holds the 100 largest non-financial companies listed on Nasdaq by market cap. Both are market-cap weighted, but the Nasdaq-100 uses a modified method that caps and adjusts weights so no single stock grows too dominant. Because selection is based on the listing exchange rather than a balanced mix of industries, technology companies end up with a large share.

Why the Dow is weighted by price

The Dow Jones Industrial Average, first published in 1896, is one of the oldest indexes still in use and today holds 30 large companies that represent the US economy. It started in an era without calculators by adding up a few share prices and dividing, so it is still weighted by share price rather than market cap. A stock with a higher share price moves the index more, regardless of how big the company is. A divisor is adjusted when members change or a stock splits so the index does not jump, and as a result a stock that splits loses influence in the index in line with its lower share price. Despite the word industrial in its name, it includes companies from finance, technology, consumer goods and other sectors.

Why the three move differently on the same day

All three indexes cover large US companies, but different rules produce different daily results. The gap usually comes from four sources.

• Sector mix: the tech-heavy Nasdaq indexes pull away on days when technology stocks make big moves
• Weighting: market-cap weighting and price weighting reflect the same stock's move at different sizes
• Number of stocks: with only 30 members, the Dow can swing on news from one or two companies
• Concentration in the largest names: in a market-cap weighted index, a few top stocks can decide the day

Things to watch on an index chart

When you read an index chart, keep in mind the conventions behind the number, not just the number itself. The Dow has a large index level, so moves of hundreds of points in a day are common, but point changes cannot be compared across indexes; always look at percentages. The indexes people usually watch are price indexes that leave out dividends, so they sit below what reinvesting dividends would have produced. Over very long periods such as decades, a log scale shows proportional changes more fairly. Index values are calculated during the regular session, so the overnight picture comes from index futures. And an index itself is not something you can buy; the funds and futures that track it can drift slightly away from it.

Check it with this site's live tools

The world markets and currencies overview shows the S&P 500, Nasdaq and Dow on one screen alongside other countries' indexes and lines up their returns over several periods. Pick the three indexes in the stock comparison tool and rebase them to 100 on the same day to compare cumulative paths, volatility and maximum drawdown without the distortion of point sizes. The index crash and recovery record tool lets you look at each index's large declines and how long each one took to recover. Prices come from a data provider and may be delayed.

Things to keep in mind

This guide is educational material on how the major US indexes are built, not investment advice. Please do not read it as saying any index, or any product tracking one, is better than another. Rules such as constituents, eligibility criteria, weight caps and the timing of scheduled changes can be revised by the index provider, so check each provider's official materials for the exact details. When investing in funds or futures that track an index, also check the factors an index does not have, such as fees, currency effects and tracking error.