Every market report quotes the S&P 500, the Nasdaq and the Dow. They often move together, but they measure quite different slices of Wall Street.
When people say “Wall Street” rose or fell, they usually mean one of three sharemarket indexes: the S&P 500, the Nasdaq or the Dow Jones Industrial Average.
Each one combines the share prices of a group of companies into a single number. The difference is which companies they include, and how much weight each company gets.
The S&P 500 tracks about 500 of the largest companies listed in the United States, chosen by a committee at S&P Dow Jones Indices. Companies are weighted by their market value, so the biggest companies have the most influence. Because it covers so much of the U.S. market across every industry, it’s the benchmark most professional investors use, and the one many index funds and super fund options follow.
The Nasdaq Composite includes the companies listed on the Nasdaq stock exchange, which numbers in the thousands. Nasdaq has long been the home of technology companies, so the index is heavily influenced by tech and tends to rise and fall more sharply than the broader market. A related index, the Nasdaq-100, tracks the 100 largest non-financial companies on the exchange.
Why the Dow is the odd one out
The Dow Jones Industrial Average is the oldest of the three, dating back to the 1890s, and the most famous name. But it follows just 30 large U.S. companies.
It’s also calculated differently. The Dow is weighted by share price, not company size, so a company with a high share price moves the index more than a much bigger company with a lower share price. That’s one reason many professionals see it as less representative than the S&P 500, even though it remains a widely quoted headline number.
In practice, the three indexes usually move in the same direction on a given day, because many of the same large companies appear in all of them. The gaps show up when one part of the market is doing better than another. A strong day for technology shares, for example, can lift the Nasdaq much more than the Dow.
Today, a small group of very large technology companies, including Nvidia, Apple and Microsoft, makes up a large share of both the S&P 500 and the Nasdaq. That means the fortunes of a handful of companies can drive the whole market.
For Australian investors, Wall Street matters even outside U.S. trading hours. The overnight lead from New York often sets the tone for the ASX when it opens, and U.S. shares are a large part of many superannuation portfolios.
