Global stock market indices serve as reliable economic indicators for both the world’s economies and those of individual nations. The three indexes that investors and the media in the United States pay the most attention to are the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite. The United States equities market is made up of these three indices and almost 5,000 additional ones.
The U.S. market offers a wide variety of techniques and categorizations that can be used for a wide variety of purposes because it has so many indices. The top three indices are frequently covered by the media throughout the day, with important news stories acting as both supporters and opponents of the trend. Indexes serve as benchmarks for performance reporting used by investment managers.
In the meantime, indexes are used by all kinds of investors as allocation and performance proxies. Indexes also serve as the foundation for passive index investing, which is frequently carried out primarily through exchange-traded funds that follow particular indexes.
Overall, knowing how market indexes are created and used can help make a range of investing options more meaningful and clear. We go into more detail on the three most popular U.S. indexes below, as well as the Wilshire 5000, which is a compilation of all the equities traded on the U.S. stock market.
The S&P 500
The 500 best-performing U.S. corporations make up the Standard & Poor’s 500 Index, also referred to as the S&P 500. The constituent committee selects stocks for the index primarily based on capitalisation, although it also takes into account liquidity, public float, sector classification, financial viability, and trading history.
The S&P 500 Index accounts for over 80% of the total market value of the American stock market. The S&P 500 Index, in general, provides a solid indication of movement in the American market as a whole.
Market- or price-weighted indices are the norm. A market-weighted index is the S&P 500 Index (also referred to as capitalization-weighted). Each stock in the index is therefore reflected in the index according to its market capitalization. In other words, the value of the index likewise decreases by 10% if the combined market value of all 500 companies in the S&P 500 declines by 10%.
DAWN JOHNSON INDUSTRIAL AVERAGE
One of the oldest, most well-known, and commonly used indices in the world is the Dow Jones Industrial Average (DJIA). It contains the shares of 30 of the biggest and most significant American corporations.
A price-weighted index, the DJIA. It was initially calculated by adding up the share prices of all the index firms’ stocks and dividing the result by the total number of companies. Unfortunately, it is no longer so easy to calculate the index. The divisor, a figure calculated by Dow Jones to determine the level of the DJIA, has changed over time as a result of stock splits, spin-offs, and other events, making it a very small number (less than 0.2).
The DJIA accounts for around 25% of the value of the whole U.S. stock market, but a shift in the Dow’s percentage shouldn’t be taken as proof that the market as a whole has declined by that same percentage. The Dow’s price-weighted function is to blame for this. The fundamental issue is that, even though the price of the higher-priced stock may have changed by only 0.8 percent and the other by 5 percent, a $1 change in the price of a $120 stock in the index will have a greater impact on the DJIA than a $1 change in the price of a $20 stock.
When the Dow fluctuates, investors’ expectations for the profits and dangers of the significant corporations that make up the index have changed. The Dow should not be used to represent mood in other sectors of the market because the overall attitude toward large-cap companies frequently differs from the attitude toward small-cap stocks, international equities, or technology stocks.
The Dow is well regarded for featuring the greatest blue-chip companies with steady dividend payments on the American market. It can therefore be a representation of the blue-chip, dividend-value market even though it is not necessarily a representative of the overall market.
Indexing the Nasdaq Composite
Most investors are aware that technology companies are traded on the Nasdaq exchange. All of the equities traded on the Nasdaq stock exchange are included in the market capitalization-weighted Nasdaq Composite Index. Some businesses that are not based in the United States are included in this index.
This index, which is well-known for being heavily weighted toward technology, covers a number of segments of the tech industry, including software, biotech, semiconductors, and more. Despite the fact that this index is well known for its high concentration of technology firms, it also contains some securities from other sectors.
Securities from other industries, including as those in the financial, industrial, insurance, and transportation sectors, are also available to investors. In contrast to the Dow and the S&P 500, the Nasdaq Composite also includes a significant number of speculative companies with modest market capitalizations. As a result, its movement typically reflects the health of the technology sector as well as investor sentiment toward riskier stocks.
The 5000 Wilshire
The Wilshire 5000 is sometimes known as the “whole market index” or “complete stock market index” since it covers all publicly traded firms with U.S. headquarters and widely accessible pricing information. This index, which was completed in 1974, shows the whole U.S. stock market and its overall movement. The Wilshire 5000 is mentioned less frequently than the more well-known S&P 500 Index, despite the fact that it represents a fairly thorough gauge of the whole U.S. market.