NASDAQ for Novices

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I need some guidance. I’m college sophomore taking an introductory course focused on investing and financial markets. I decided to take the class because my dad suggested it. He’s been a CPA for most of his life and probably expects me to take a liking to numbers, too.

Unfortunately, most of the stuff is rather uninteresting to me. More importantly, it’s all extremely hard to understand. This week we’re discussing the importance of using an index to make investment decisions. We’re supposed to identify a specific index and then present it to the wider class.

I was originally deciding between the Dow Jones and NASDAQ but came across way too much information to grasp myself. What’s the difference between the two?

Understanding the stock market and how people invest in it successfully is no simple task. There are a lot of moving parts. Indices are just one important factor. The first step is developing an appropriate foundation of knowledge and intent. People shouldn’t begin investing unless they know exactly what to expect. Fortunately, staff writers at the US Securities and Exchange Commission (SEC) maintain a public checklist of ten things to consider before making investment decisions. You’ll notice the list is fairly comprehensive and for good reason. Knowledge is power, especially when it comes to prudent investing.

That brings us to another critical step for investors. The only way to make consistent investment decisions is to commit to a long-term investment strategy. As you can probably imagine, there’s absolutely no shortage of different investment strategies to explore. Kent Thune at The Balance already wrote an article highlighting some of the best investment strategies available to you. That’s an excellent place to begin your research because he openly dismisses the idea of any single best strategy and instead proposes the idea of selecting the best fit. Remember that as you review the five major categories that he introduces to readers.

Tapping into investment indices only makes sense once you’ve decided on an investment strategy. An index is similar to a ruler in the sense that it lets a user gauge and measure the relative distance between different points. In other words, indices are tools you can use to guide your decision-making process. John Authers at Financial Times published a highly-informative article explaining why investors need to know about indices. According to him, using an index is a no-brainer because indices only grown more powerful and are essential for benchmarking performance.

You’ll also want to present some countervailing perspectives to achieve a degree of balance. For instance, Ken Little at The Balance is much more skeptical about the predictive value derived from utilizing indices. He reveals the fact that any given index will have serious flaws that must be taken into consideration before conclusions can be drawn. The most successful investors understand that and have significant experience making informed decisions based on data collected from a wide variety of sources, including indices.

Editors at Investopedia have already done you the favor of outlining the difference between the Dow Jones and the Nasdaq. You’ll see that both are typically confused with seemingly related terms. Both of them are aggregate indices. In other words, they represent movements based on multiple company stocks. The Dow Jones Industrial Average (DJIA) tracks the performance of approximately thirty companies, whereas the Nasdaq tracks a whopping 4,000 by comparison. These indices simply represent different aspects of the current stock market. Most companies listed on the DJIA are also included in the New York Stock Exchange (NYSE), which makes it much easier to research them. You’d have to tap into more detailed resources to investigate NASDAQ stocks and the companies listed there.

“An investment in knowledge pays the best interest.” – Benjamin Franklin

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