The most well-known and established market index is the Dow Jones Industrial Average, also known as the Dow. It has been around since 1896 and consists of 30 blue-chip, American businesses that trade on either the Nasdaq or the New York Stock Exchange. The Dow includes some of the biggest publicly traded businesses in the nation, including Apple, Coca-Cola, Home Depot, and Nike, to mention a few.
The Dow Jones Industrial Average has a rich historical significance, but its small sample size of just 30 firms and the index’s price weighting, rather than the value of the company itself, render it an unreliable gauge of the market as a whole. Some of the allusions to the Dow may be used to make the current market action appear more dramatic. Think about which of the following headlines is more likely to garner attention: “The Dow fell 300 points today,” or “The S&P 500 was down 36 points today.” The reduction is around 1% in both situations.
However, there is a point in the Dow’s activities when it merits headlines: when the composition of those 30 businesses changes. For instance, the index switched Salesforce, Amgen, and Honeywell International for Pfizer, Raytheon Technologies, and Exxon Mobil in August 2020. For the businesses entering the index, it’s a time of prestige, while for those dropping off, it’s a sign of recent performance weakness or declining importance.
Because it is a stock exchange, hearing “the Nasdaq” at first may seem a little perplexing. The Nasdaq Composite and the Nasdaq 100, on the other hand, are two market indices that mirror the ups and downs of specific equities that are traded on the Nasdaq exchange.
More than 2,500 firms are included in the Nasdaq Composite, while 100 big non-financial stocks, such as Starbucks, Netflix, Tesla, and PepsiCo, are included in the Nasdaq 100. The Nasdaq indexes are frequently used as a benchmark for the performance of technology equities, although they also include firms from other sectors.
Regardless of the stock market that hosts their trading activity, the S&P 500 includes 500 sizable, U.S.-based publicly traded firms, including all those featured in the Dow Jones Industrial Average. Even though there are more than 6,000 publicly traded U.S. stocks, this index only covers 500 of them, the S&P 500 provides a more thorough picture of market activity than either the Dow or the Nasdaq 100. According to S&P Global, it accounts for around 85% of the value of all publicly traded companies in the United States. Companies are weighted in the S&P 500 according to their total market capitalization, which is calculated by multiplying their stock price by the number of outstanding shares. According to this formula, bigger businesses are more significant than smaller ones. In actuality, more than 20% of the value exists in Apple.
Even though it excludes thousands of smaller and midsize companies, the S&P 500 is thought to be a far better indicator of how the market is performing because it includes hundreds of large companies and accounts for the majority of overall stock market value. It’s crucial to keep in mind that the S&P 500 fluctuates more frequently than the Dow as new companies join the mix and older ones are no longer deemed large enough to be included.
There are other ways to analyse market performance than using the Dow, Nasdaq, or S&P 500. The Russell 2000 is only concerned with small-cap stocks, while the Wilshire 5000 is intended to represent the whole U.S. stock market. These newer businesses tend to be riskier, but they also provide what every investor seeks: more potential for growth and profit.
Three important market indices are the Dow, Nasdaq, and S&P 500. Though it has a small representation, the Dow tracks 30 significant U.S. corporations. Tech and other stocks are given additional attention by the Nasdaq indexes, which are linked to the Nasdaq market. A more thorough market overview is provided by the S&P 500, which includes 500 significant U.S. companies and is weighted by market capitalization. The Wilshire 5000 and Russell 2000 are two other indices that cover a wider range of market categories.