Know Your Index - The Dow Jones and Nasdaq 100

Looking at how the Dow Jones and Nasdaq index are calculated.

Why do people quote the Dow index or refer to the Nasdaq 100 when discussing the health of the U.S. economic market? The answer lies in the size and economic power that the 130 companies listed in these indices has over the overall economic health of the nation. The roots of these indices may not date back to the origin of the American stock market, but they are deeply entrenched in the U.S. economy and a hot bed of daily trading activity.

Dow Jones Industrial Average

Charles Dow, a Wall Street Journal editor, devised the Dow Jones Industrial Average in the 19th century as a way of measuring the performance of industrial stocks in the early U.S. stock market. Recognizing the burgeoning growth of industry, Dow saw the need to track these huge industry giants separately from the other stocks that comprised the singular market of the time. In the end, he created an average of the 30 largest publicly traded companies in the U.S. at the time. While industry has evolved to take on new definitions, the Dow index, as it is commonly called, continues to list only the 30 largest U.S. companies. Interestingly, out of the original companies, only GE remains in existence today.

The Nasdaq 100

Commonly mistaken for the Nasdaq Composite, the Nasdaq 100 was developed January 31, 1985 as an index listing the top 100 non-financial companies listed on the NASDAQ. Unlike the Dow Jones Industrial Average and the S&P 500, the Nasdaq 100 does not include any financial companies and also includes companies that were incorporated outside of the United States. Traded on the Chicago Mercantile Exchange, the Nasdaq 100 offers investors enhanced investment options. The Nasdaq 100 was created as a way for investors to utilize mutual funds, options, and futures investments of these companies, rather than just traditional stock investments.

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Why These Indices Lead the Way?

The Dow may only have thirty companies (as opposed to the S&P 500 with many more), but it does feature the largest companies in the U.S. and has proven to be a great gauge of the overall market. However, the Nasdaq continues to lead the way in trading activity. Home to a large number of hot tech companies, the Nasdaq produces more shares traded per day than any other market index. This makes having a good gauge of this market extremely important for investors and economists alike.

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