Nasdaq vs. S&P 500: Understanding the difference

When you pull out your phone to see how your investments are doing, you might see the top items in the list as the Dow Jones Industrial Average (DJIA), the Standard and Poor’s 500 (SPX) and the National Association of Securities Dealers Automated Quotations (Nasdaq). You may also know that the Nasdaq is a stock market with its headquarters in Times Square, New York City. But what do these numbers mean? Knowing the answer can help you decode the stock market and guide your investing.

Stock exchange vs. an index

A stock exchange is a physical or digital marketplace where securities are bought and sold. The Nasdaq, for example, is a global electronic marketplace for buying and selling securities that is known for its high concentration of tech stocks. On the other hand, an index is a statistical measure that represents the performance of a basket of assets, intending to reflect the overall market or a specific sector of it. The Nasdaq Composite (IXIC) is such an index, which includes the top 100 non-financial stocks listed on the Nasdaq stock exchange. Because of this, the Nasdaq Composite is also referred to as the Nasdaq 100. This means that while the Nasdaq facilitates the trading of securities, the Nasdaq Composite provides a snapshot of the market performance of those securities. While there are other indexes, this article will highlight the difference between the Nasdaq Composite and the S&P 500 indexes specifically.

How are indexes guides for investors?

The Standard & Poor's 500, or S&P 500, is an index comprising 500 of the largest companies listed on stock exchanges in the United States. It's widely regarded as one of the broadest breadth of indicators of the U.S. equities market due to its diversity and the size of the companies included. The S&P 500 works by weighting the market capitalizations of its constituent stocks, which means companies with higher market caps have a more significant impact on the index's performance. This method ensures that the index accurately reflects the movement of capital in the market, making it a critical tool for investors to gauge where investment dollars are going.

The Nasdaq Composite Index is, like the S&P 500, a digital scoreboard that tracks the performance of all the stocks listed on the Nasdaq stock exchange. This index includes over 2,500 companies from various industries like technology, retail and biotechnology, making it a somewhat more comprehensive indicator of the stock market's health, albeit with an emphasis on technology. The Nasdaq itself is notable for being the second-largest stock exchange in the world by market capitalization and operates entirely electronically, unlike the New York Stock Exchange which has a physical trading floor.

One of the key characteristics of the Nasdaq Composite is its emphasis on technology companies as it features major tech giants. The Nasdaq got its reputation as a tech-focused exchange when it listed Microsoft in 1986, a move that showed it was willing to work with up-and-coming technology companies. The index is calculated based on the market capitalization of its constituent companies, meaning larger companies have more influence on the index's movement.

Both indexes track a basket of stocks, and investors who buy funds that mimic the index will see their shares in the fund go up and down at the same price point as the underlying index. For example, if you buy shares of the SPDR S&P 500 ETF Trust (SPY), one of the oldest funds that tracks the S&P 500, the price of the fund is closely correlated with the number of the index: When the S&P 500 is at 5,000, SPY is close to $500 per share. 

The benefit of index investing is diversification. While you can't invest directly in an index, you can invest in funds that track the index. By owning a basket of 500 or 2,500 stocks, you avoid the volatility of owning one company’s stock, which may be up on good news and down on a bad news day. On the other hand, with index investing it is unlikely you will outperform the market. For most investors, this is a good tradeoff: Researchers have argued that stocks can be a hedge against inflation, and owning a wide basket of stocks also protects against downside volatility. But the value of index investing with the S&P 500 or the Nasdaq Composite index depends on several factors.

Sector preference

In a comparative study between the Nasdaq 100 and the S&P 500, the Nasdaq 100 outperformed the S&P 500 every year from 2007 to 2025 posting a total average return of +17.1% compared to the S&P 500 return of +12.2%. A notable exception is 2022 when the Nasdaq 100 underperformed relative to the S&P 500 by -14.3%. During this period, growth stocks, and tech stocks in particular, lagged the rest of the stock market. The takeaway is that over a longer time horizon, risks in both indexes are generally smoothed out and the growth in the tech-weighted Nasdaq index tends to be higher than the S&P 500, even though there's no guarantee that will occur.

Diversification opportunities

Indexes like the S&P 500 and the Nasdaq Composite track a basket of stocks and consequently are more diversified than owning individual stocks, which can help mitigate the risks of any individual security. While such indexes mitigate volatility given their diversification, it’s important to note that some stocks within the index may experience outsized returns or losses. This was the case with the S&P 500 in 2023 and 2024 as seven stocks nicknamed the Magnificent Seven powered the index higher even as the majority of stocks in the index have seen more moderate gains.

How do you invest in an index like the Nasdaq Composite or S&P 500?

While you cannot invest in an index directly, there are investments like index exchange-traded funds (ETFs) that track the performance of the underlying index. For example, you can purchase shares of an exchange-traded fund (ETF) that mirrors the performance of the Nasdaq Composite or S&P 500. These ETFs can be bought and sold just like stocks through a brokerage account, offering the flexibility of trading throughout the day at market prices. Mutual funds that track the Nasdaq Composite or S&P 500 may also be an option, depending on their availability. It should be noted, however, that mutual funds can only be bought and sold at the end of each trading day, unlike ETFs.

The bottom line

The Nasdaq Composite and the S&P 500 are some of the stock indexes that track the performance of a basket of stocks that represent the biggest and most successful companies in the U.S. The S&P 500 follows the 500 biggest companies in the U.S., and the Nasdaq Composite follows the biggest 100 non-financial stocks traded on the Nasdaq exchange. Indexes can be helpful in gauging the health and performance of the market overall or the sectors they track. They can also be a means of investing in a diversified portfolio.

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