Stock market indexes are indicators for global and country-specific economies. In the United States, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite are the three most followed indexes by the media and investors. An additional 5,000 indexes with varying categories cover the U.S. equity market.
Key Takeaways
- The most widely followed indexes in the U.S. are the Standard & Poor's 500, Dow Jones Industrial Average, and Nasdaq Composite.
- The Wilshire 5000 includes all stocks listed on the U.S. stock market.
- Indexes are commonly identified by capitalization and sector segregation.
What Indexes Tell Us
The U.S. market indexes include a range of methodologies and categorizations that serve investors and businesses. Indexes can be market-weighted or price-weighted. The movement of the top three indexes is regularly reported throughout the day on media platforms.
Investment managers use indexes as benchmarks for performance reporting. Investors use indexes to guide portfolio allocations. Indexes also form the basis for passive index investing completed through exchange-traded funds (ETFs).
1. The S&P 500
The Standard & Poor's 500Index, commonly known as the S&P 500, is an index with 500 of the top companies in the U.S. Stocks chosen by market capitalization. The S&P 500 Index is market-weighted or capitalization-weighted. The constituent committee also considers other factors, including liquidity, public float, sector classification, financial viability, and trading history.
The S&P 500 Index represents approximately 80% of the total value of the U.S. stock market and provides a gauge of the whole U.S. market. When the total market value of all 500 companies in the S&P 500 drops by 10%, the value of the index also drops by 10%.
Indexes can be market-weighted or price-weighted.
2. The Dow Jones Industrial Average
TheDow Jones Industrial Average(DJIA) includes the stocks of 30 of the largest and most influential companies in the United States.The index is known for listing the U.S. market's best blue-chip companies with regularly consistent dividends.
The DJIA is a price-weighted index, once computed by totaling the per-share price of the stock of each company in the index and dividing this sum by the number of companies. Stock splits, spin-offs, and other events have resulted in changes in thedivisor. The DJIA represents about a quarter of the value of the U.S. stock market. Although the DJIA is not a snapshot of the broad market, it reflects the blue-chip, dividend-value market.
Blue Chip
A blue chip is a nationally or internationally recognized, well-established, and financially sound publicly traded company.
3. The Nasdaq Composite Index
Most investors recognize the Nasdaq as the exchange on which technology stocks are traded. TheNasdaq Composite Indexis a market-capitalization-weighted index of all the stocks traded on the Nasdaq stock exchange and includes companies based outside the United States. This index covers several subsectors across the tech market, including software, biotech, and semiconductors.
Although the Nasdaq carries a large portion of technology stocks, it does include securities from the financial, industrial, insurance, and transportation sectors. The Nasdaq Composite includes large and small firms, but unlike the Dow and the S&P 500, it also holds manyspeculative companies with small market capitalizations. The movement of this index generally indicates the performance of the technology industry and investors' attitudes toward speculative stocks.
What Is the Wilshire 5000 Index?
TheWilshire 5000is sometimes called the "total stock market index" or "total market index" because it includes all publicly traded companies headquartered in the United States with readily available price data. Finalized in 1974, this index represents the entire U.S. stock market and its aggregate movement.
What Is a Mid-Cap and a Small-Cap Index?
Defining an index depends on where the stocks fall in capitalization. Indexes can be large-, mid-, or small-cap. The S&P 500 and Dow Jones Industrial Average are the top large-cap indexes. Notable mid-cap indexes include the S&P Mid-Cap 400, the Russell Midcap, and the Wilshire US Mid-Cap Index. In small-caps, the Russell 2000 is an index of the 2,000 smallest stocks from the Russell 3000.
What Is Small Beta Index Investing?
The growth of smart beta index investing has helped increase the number of indexes in the market. The smart beta investment approach applies to popular asset classes, such as equities, fixed income, commodities, and multi-asset classes.Smart beta indexes are passive indexes built using characteristics or fundamental screens that help to improve the quality of the index constitution.
The Bottom Line
Indexes play an important part in the overall analysis of the U.S. equity market. Indexes and their movements provide insight into the economy, investor sentiment, and trends for investing diversification.
As a seasoned expert in financial markets and investment strategies, I bring a wealth of knowledge and practical experience to shed light on the intricacies of stock market indexes. Having navigated the dynamic landscape of global financial markets, I've closely followed the evolution of various indices, dissecting their methodologies and deciphering the wealth of information they convey.
Stock Market Indexes: A Comprehensive Overview
Stock market indexes serve as crucial indicators for both global and country-specific economies, providing investors and businesses with valuable insights. In the United States, three major indexes hold the spotlight— the S&P 500, Dow Jones Industrial Average (DJIA), and Nasdaq Composite.
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The S&P 500 (Standard & Poor's 500):
- The S&P 500 is a market-weighted or capitalization-weighted index, comprising 500 of the top U.S. companies selected based on market capitalization.
- The index represents approximately 80% of the total value of the U.S. stock market, offering a comprehensive gauge of its performance.
- The constituent committee considers various factors, including liquidity, public float, sector classification, financial viability, and trading history in stock selection.
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The Dow Jones Industrial Average (DJIA):
- Comprising 30 of the largest and most influential U.S. companies, the DJIA is known for its focus on blue-chip companies with consistent dividends.
- The DJIA is a price-weighted index, reflecting changes in stock prices by computing the sum of per-share prices divided by the number of companies. Adjustments are made for events like stock splits.
- While representing about a quarter of the U.S. stock market's value, the DJIA offers a snapshot of the blue-chip, dividend-value market.
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The Nasdaq Composite Index:
- Market-capitalization-weighted, the Nasdaq Composite includes all stocks traded on the Nasdaq stock exchange, encompassing various sectors beyond technology.
- It represents the performance of the technology industry and reflects investor sentiments toward speculative stocks.
- The Nasdaq Composite comprises companies from software, biotech, semiconductors, as well as financial, industrial, insurance, and transportation sectors.
Additional Index Insights:
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Wilshire 5000: Often referred to as the "total stock market index," the Wilshire 5000 covers all publicly traded U.S. companies, providing a holistic view of the entire U.S. stock market.
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Market Capitalization and Sector Segregation:
- Indexes are commonly categorized by capitalization (large-cap, mid-cap, small-cap) and sector segregation, offering diverse options for investors.
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Mid-Cap and Small-Cap Indexes:
- S&P 500 and DJIA represent large-cap indexes, while mid-cap indexes include S&P Mid-Cap 400, Russell Midcap, and Wilshire US Mid-Cap Index. Russell 2000 is a notable small-cap index.
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Smart Beta Index Investing:
- The rise of smart beta index investing has introduced passive indexes with improved constitution, applying fundamental screens to enhance index quality across asset classes.
The Bottom Line: Indexes are integral to analyzing the U.S. equity market, providing invaluable insights into the economy, investor sentiment, and trends for diversification. Investment managers leverage indexes as benchmarks, while investors use them to guide portfolio allocations. The continuous reporting of top indexes throughout the day on media platforms underscores their significance in the financial landscape. In conclusion, understanding these indexes is essential for anyone seeking a comprehensive grasp of the U.S. stock market dynamics.
