Breaking Down the Three Major Stock Indexes

If you have ever read an investment article or tuned into a financial program on TV, chances are good you’ve already been exposed to some of the major stock indexes. While there are literally dozens of them, today we focus on three of the most prominent examples: the Dow Jones Industrial Average, the NASDAQ Stock Market Composite, and the S&P 500.

Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA), often referred to simply as, “The Dow,” is one of the oldest and most well-known stock indexes in the world. It was invented by Charles Dow and Edward Jones back in 1896 to serve as a representation of the greater U.S. economy. When the index first launched, it included 12 companies, almost all of which were industrial.

Today, the DJIA includes stocks from 30 companies in all different sectors, which collectively make up about 25% of the total market. These companies are household names and leaders in their industry. Examples of companies included in the Dow are General Electric, IBM, and Coca-Cola. It is a price-weighted index, meaning stocks with higher share prices have a greater weight in the index.

While the Dow Jones has undergone many changes in its history, one thing remains the same: it is commonly used to interpret the American economy as a whole.

NASDAQ Stock Market Composite

The NASDAQ Stock Market Composite is comprised of more than 5,000 stocks listed on the Nasdaq stock exchange. Although it covers companies in many different industries, it is heavily weighted towards technology stocks, which make up more than 40% of its individual securities. Unlike the other stock indexes, the NASDAQ is not limited to U.S.-based companies.

According to Investopedia, the index is calculated continuously throughout the trading day, but it is reported once per second, with the final confirmed value being reported at 4:16 p.m. each trading day.

Standard & Poor’s 500

The S&P 500 is widely regarded as the most accurate gauge of the marketplace as a whole for two reasons. First, it is comprised of 500 widely-traded companies, compared to just 30 for the Dow. Collectively, these companies make up about 80% of the market’s total value. There is also a big difference in how individual companies are weighted within each index. The S&P 500 is market-weighted, whereas the Dow Jones is price-weighted. Even though the Dow Jones is more frequently talked about, the S&P 500 will paint a clearer picture of the American economy.

The Bottom Line

By keeping an eye on these indexes and tracking their movements over time, you will begin to get a general idea of the investing public’s attitude towards different companies and sectors. While these indexes are supposed to represent the market as a whole, it is important to remember that they are simply a tool – not the gospel.

If you want to learn more about index investing, speak with one of the financial advisors at American Investment Planners, LLC. To schedule a face-to-face appointment with one of our consultants, please call (516) 932-5130 or email info@americaninvestmentplanners.com.