Indices were created to track the performance of groups of stocks. However, they come in different forms and have different purposes. They may track the performance of stocks on a particular stock exchange, such as the NYSE. They may also be created to focus on stocks that are based in multiple exchanges.
More importantly, indices are depicted by a specific figure that moves up and down, just as Forex rates in Forex trading.
There are potentially thousands of indices across the world, but two of the most popular are the NASDAQ 100 and the Dow Jones.
Here, we discuss everything you need to know about both indices and how they relate with each other.
The NASDAQ is short for National Association of Securities Dealers Automated Quotations, the second largest stock exchange in the US and the world. It is tech-focused, as it includes the stocks of most technology companies listed on the exchange.
Those stocks include Alphabet (Google), Apple, Amazon, Facebook, Tesla, and almost all other tech giants. However, there are financial, industrial, and consumer companies as well. In all, there are more than 3,300 stocks on the NASDAQ.
The top indices for the NASDAQ are the "NASDAQ Composite Index" and the "NASDAQ 100". NASDAQ Composite tracks all of the stocks listed on the NASDAQ exchange.
The NASDAQ 100 focuses on only the largest 100 stocks listed on the exchange, by market capitalisation.
The Dow Jones' full form is Dow Jones Industrial Average (DJIA), and is not an exchange. It was originally created to track 30 of the most important industrial stocks in the US. However, the stocks currently on the DJIA cover various key sectors of the economy.
These stocks range from those in technology, aerospace, consumer, pharmaceuticals, financial, energy, and retail. Specific names include Apple, Microsoft, Visa, Pfizer, JP Morgan, Coca-Cola, Chevron, and more. In Forex trading, the DJIA might be called DJ30 or US30.
There are some similarities and differences between the Dow Jones and NASDAQ Indices. Here, we go through where they correlate and differ from each other.
The NASDAQ and Dow Jones share common qualities in some ways:
Stock market helps offer an overview of the economy and its performance. The best way to get this overview is through the indices that track it.
The Dow Jones helps us know how the general economy is faring since it covers stocks covering a wider range of sectors.
NASDAQ tracks the performance of sectors such as tech and software, biotech, fintech and payments, pharmaceuticals, and others.
The traditional method to make money from the Dow Jones and NASDAQ Indices is to invest in ETFs or Index Funds that are based on them.
However, if you are into Forex trading, you might be more interested in indices trading. That involves trading the price movements of the indices, powered by leverage.
The NASDAQ and Dow Jones also diverge in a few ways:
The NASDAQ is a stock exchange, and also an index. The Dow Jones is simply an index that tracks 30 stocks.
To be a successful indices trader, you must understand the factors that move indices, those figures that look like Forex rates. The movements of the stocks in an index determine the movement of the overall index. However, how much power each stock has depends on the weighting method that the index uses.
There is market capitalisation-weighting, which means companies with larger market caps influence the index more. On the other hand, there is price weighting, which means stocks with higher prices have more influence.
The NASDAQ works on a market cap-weighting, which means that stocks with larger market caps drive the general movement of the NASDAQ 100. Thus, the general movements of Alphabet, Apple, Amazon, and Facebook will tell us where the index is headed towards for the day.
Dow Jones operates on price weighting. As a result, companies with higher prices move the index more.
Knowing how they work will help you make good trading decisions while trading the NASDAQ and Dow Jones.
However, there is so much to know before trading the Dow and NASDAQ. You can, however, become instantly profitable if you sign up with a Forex signal service that offers indices signals as well.
That way, you get to benefit and make bountiful profits from the highly volatile NASDAQ and Dow indices.