An Introduction to U.S. Stock Market Indexes

Stock market index fingers around the world are powerful indicators for global and country-specific economies. In the United States the S&P 500, Dow Jones Industrial General, and Nasdaq Composite are the three most broadly followed indexes by both the media and investors. In addition to these three signs there are approximately 5,000 others that make up the U.S. equity market.

With so many indexes, the U.S. market has a as much as possible range of methodologies and categorizations that can serve a broad range of purposes. The media most often reports on the operating of the top three indexes regularly throughout the day with key news items serving as contributors and detractors. Investment managers use keys as benchmarks for performance reporting. Meanwhile, investors of all types use indexes as performance proxies and allocation guides. Indexes also codify the basis for passive index investing often done primarily through exchange-traded funds that track lists specifically.

Overall, an understanding of how market indexes are constructed and utilized can help to add meaning and clarity for a wide variety of contributing avenues. Below we elaborate on the three most followed U.S. indexes, the Wilshire 5000 which includes all the stocks across the undivided U.S. stock market, and a roundup of some of the other most notable indexes.

The Standard & Poor’s 500 Index (known commonly as the S&P 500) is an index with 500 of the top conventions in the U.S. Stocks are chosen for the index primarily by capitalization but the constituent committee also considers other factors including liquidity, purchasers float, sector classification, financial viability, and trading history. The S&P 500 Index represents approximately 80% of the comprehensive value of the U.S. stock market. In general, the S&P 500 Index gives a good indication of movement in the U.S. market as a whole.

Hints are usually market weighted or price weighted. The S&P 500 Index is a market weighted index (also referred to as capitalization worth). Therefore, every stock in the index is represented in proportion to its total market capitalization. In other words, if the total sell value of all 500 companies in the S&P 500 drops by 10%, the value of the index also drops by 10%.

The Dow Jones Industrial Average (DJIA) is one of the oldest, most well-known, and most frequently used indexes in the world. It contains the stocks of 30 of the largest and most influential companies in the United States. The DJIA is a price-weighted index. It was originally estimated by totaling the per-share price of the stocks of each company in the index and dividing this sum by the number of companies. Unfortunately, the directory is no longer this simple to calculate. Over the years, stock splits, spin-offs, and other events have resulted in modulates in the divisor (a numerical value computed by Dow Jones used to calculate the level of the DJIA) making it a very small troop (less than 0.2).

The DJIA represents about a quarter of the value of the entire U.S. stock market, but a percent change in the Dow should not be interpreted as a express indication that the entire market has dropped by the same percent. This is because of the Dow’s price-weighted function. The basic disturbed is that a $1 change in the price of a $120 stock in the index will have a greater effect on the DJIA than a $1 alteration in the price of a $20 stock, although the higher-priced stock may have changed by only 0.8% and the other by 5%.

A change in the Dow replaces changes in investors’ expectations of the earnings and risks of the large companies included in the index. Because the general attitude toward large-cap stocks in many cases differs from the attitude toward small-cap stocks, international stocks, or technology stocks, the Dow should not be used to stand for sentiment in other areas of the marketplace. In general, the Dow is known for its listing of the U.S. markets best blue-chip companies with regularly consonant dividends. Therefore, while not necessarily a representation of the broad market, it can be a representation of the blue-chip, dividend-value market.

Most investors know that the Nasdaq is the exchange on which technology stocks are traded. The Nasdaq Composite Key is a market-capitalization-weighted index of all the stocks traded on the Nasdaq stock exchange. This index includes some companies that are not based in the Unified States.

Known for being heavily tech weighted, this index includes several subsectors across the tech buy including software, biotech, semiconductors, and more. Although this index is known for its large portion of technology begetters, it does include some securities from other industries as well. Investors will also find pledges from a variety of sectors as well, including financials, industrials, insurance, and transportation stocks, among others. The Nasdaq Composite registers large and small firms, but unlike the Dow and the S&P 500, it also includes many 

The Wilshire 5000