Dow Jones, Nasdaq, and more: the key differences

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When a new stock trader kicks off their career on the markets, it’s common for them to feel a little overwhelmed by the range of choice on offer. Not only are there hundreds or even thousands of individual stocks to choose from: there are also lots of stock exchanges to go for, too.

It can be a little complex to get your head around the different American exchanges, especially given that many other countries in the world just have one headline exchange. As one of the finance sector’s world leaders, the US has a huge amount of high-profile exchanges. What’s the difference between them all, and how can a trader optimize their trading for each one? This article will find out.

What is a stock exchange?

Before looking at each individual stock exchange and working out a good trading strategy for each one, it’s a good idea to explore the definition and principles of stock exchanges generally. The idea behind a stock exchange is that it centralizes the purchasing and selling of stocks. The alternative, having to approach individual companies to find out what stocks they are selling and then buying them in an unregulated way, would be chaotic.

The main advantage from a trader’s perspective is that having a stock exchange in place means that there’s a single, comprehensive market for major stocks. This makes the purchasing process easier, and it also means that there’s some added safety for the trader – or, at least, it makes due diligence easier. Exchanges require the businesses which list on them to follow a certain set of rules about financial disclosures and other key information. Brokerages like Capital Markets Elite Group can help facilitate these transactions, especially given their wide reach and coverage of various markets.

For a business, a stock exchange is a valuable way to raise funds through what is known as an initial public offering, or IPO. The money the trader spends on buying the stock is then used by the firm in question on operational costs, or to reward shareholders.

Dow Jones

The Dow Jones is one of the world’s most famous stock markets – and, crucially, it’s also the largest in the US by the metric of market capitalization. For a trader, one of the major reasons why investing in the Dow is so potentially lucrative is that, in addition to its relatively large market cap, it is also very globalized. A lot of firms listed on the Dow have an international presence, and it’s the sort of stock exchange which attracts corporations that have a global footprint – so this is unlikely to change.

The benefit of this for a trader is that the Dow won’t necessarily plunge in value if the American economy tanks. Holding some stock in international companies on the Dow Jones, or indeed in a tracker fund that matches its performance, is a good way to manage risk. However, deciding to invest in the Dow Jones could also mean a heightened burden of research: performing due diligence on international firms isn’t quite so easy as doing it on American firms, and there may be a higher time commitment needed. As always, then, there’s a tradeoff to be made between the upside and the downside.

Nasdaq

One of the key things to remember about the NASDAQ, or the NASDAQ 100 as it is properly known, is that it does not feature financial companies. Unlike some of the world’s other leading exchanges, it is non-financial – and instead focuses on other sectors. It is widely considered to be one of the world’s strongest indicators of the health of the technology sector, which means that those who have an interest in speculating on the performance of social media firms, biotech companies and more may be interested. It also lists shares from the retail and healthcare sectors.

NYSE

The New York Stock Exchange and its related subsidiaries contain some of the world’s most popular stocks. It’s also known for being highly liquid, and it is understood to have nearly three times as much liquidity as other exchanges – meaning that traders who value the ability to sell their holdings as they please may find this a useful exchange on which to trade. The exchanges that are subordinate to the main NYSE, meanwhile, are also good options for traders to consider. The NYSE American, as it is known, offers traders the chance to invest in companies that have smaller market capitalizations, and hence are earlier on in their journeys compared to some of the corporations on the bigger markets.

In short, there are some pretty big differences between all of these stock exchanges. From the internationalized nature of the Dow Jones to the technology focus of the NASDAQ, there’s a stock exchange for every sort of trader. But all stock exchanges have some things in common. In the end, it’s up to the individual trader to work out which exchange is right for them.