Overview of Stock Market Indices

Introduction

Stock market indices, also known as stock indexes, are indices that allow investors to measure the performance of a portfolio of securities, often a market in general. An index is made up of many stocks that have a sum value assigned to them. They are an ideal way to track market performance in specific categories. Indices are calculated from the prices of the stocks that make up the index.

Definition of Stock Market Indices

A stock market index is an index that measures a stock market, or a narrow subset of stocks. It is calculated from the prices of selected stocks which are weighed according to their market capitalization. The value of the index is calculated by taking the sum of all the prices of the stocks included in the index, and dividing it by a divisor that is set to ensure continuity. The index is used to measure and compare the performance of the stocks that make up the index. The index can also be used as a benchmark to compare the performance of other stocks or markets.

Overview of Main Stock Market Indices

There are a variety of stock market indices available, each with a different focus. Common indices include:

• The Standard & Poor's 500 Index (S&P 500): measures the performance of the 500 largest stocks listed on the New York Stock Exchange.
• The Dow Jones Industrial Average (DJIA): tracks the performance of the 30 largest stocks listed on the New York Stock Exchange.
• The NASDAQ Composite Index: tracks the performance of all stocks listed on the NASDAQ.
• The Russell 3000 Index: tracks the performance of the 3000 largest stocks listed on the major U.S. stock exchanges.

S&P 500 Index

The Standard and Poor's (S&P 500) Index is a stock market index that is based on the market capitalization of 500 of the largest publicly traded companies in the US. It has become the benchmark for gauging the performance of the US stock market, and consists of stocks from the various 10 market sectors of the US economy.

Definition

The S&P 500 Index is a market-capitalization weighted index comprised of 500 publicly traded US stocks. It is designed to represent the performance of major US companies, and is used by market professionals and index investors to reflect the general performance of the US stock market. As such, it is one of the most commonly used indices for investors.

History

The S&P 500 Index was launched in 1923 and originally consisted of only 233 companies. The constituents were chosen by a committee based on their prominence in the business world. Over the years, the index underwent various expansions and modifications, and today, it is composed of the 500 largest and most liquid Companies that are listed on the NYSE, NASDAQ and AMEX exchanges.

Components

The S&P 500 Index contains stocks from all 10 major sectors of the US economy, including: consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, telecommunications, and utilities. Each sector is represented proportionally to its size in the US stock market.

• Consumer Discretionary: 15.3%
• Consumer Staples: 12.5%
• Energy: 8.2%
• Financials: 16.1%
• Health Care: 13.6%
• Industrials: 11.2%
• Information Technology: 21.7%
• Materials: 5.2%
• Telecommunications: 2.6%
• Utilities: 3.9%

Dow Jones Industrial Average

The Dow Jones Industrial Average, or DJIA, is a market index composed of 30 of the world’s largest publicly-traded companies. It was created in 1896 by Charles Dow and Edward Jones and is considered to be the oldest and most followed of all stock market indices.

Definition

The DJIA is a weighted average of the stock prices of 30 large companies in the US. The index’s weightings are based on the companies’ share prices and market value, creating a single number that accurately reflects the overall performance of the stock market. This index is used as a benchmark in the market, and is used to measure the market’s overall performance over a period of time.

History

The first version of the DJIA was created in 1885, when Charles Dow and Edward Jones published the Dow Jones Railway Average, which included 11 railway stocks. This was the first stock index to ever be created and publicly traded. In 1896, the number of stocks was increased to 20, and was renamed the Dow Jones Industrial Average in 1916. Since then, the index has grown to include 30 stocks and has become a global benchmark for stocks.

Components

The 30 companies held in the index are selected by the Dow Jones index committee, which meets regularly to review the companies in the index. They are chosen for their representation of large US stock market sectors, and the stocks in the index range from some of the oldest, most established companies in the industry. Currently, the index includes companies from technology, finance, energy, consumer goods, transportation, and other industries.

• Apple (AAPL)
• Walt Disney (DIS)
• Exxon Mobil (XOM)
• Johnson & Johnson (J&J)
• Microsoft (MSFT)
• JP Morgan Chase (JPM)
• UnitedHealth Group (UNH)
• Chevron (CVX)
• Visa (V)
• McDonald’s (MCD)

NASDAQ Composite Index

The Nasdaq Composite Index is a stock index representing a capitalization-weighted composite of all stocks listed on the Nasdaq Stock Exchange. The index helps measure the performance of all Nasdaq-listed stocks over time.

Definition

The Nasdaq Composite Index is composed of over 3,000 stocks, representing different industries, listed on the exchange. It is a market capitalization-weighted index, meaning the changing values of stocks with higher market capitalization will have a greater impact on the index than those stocks with lower market capitalization. The Nasdaq composite is one of the three most-followed indices in the United States, along with the S&P 500 and the Dow Jones Industrial Average.

History

The Nasdaq Composite Index was first introduced in 1971. This index includes all stocks that trade on the Nasdaq Stock Exchange, regardless of market capitalization. As the number of companies listed on the Nasdaq has grown, so has the size of the Nasdaq Composite Index.

Components

The Nasdaq Composite Index is comprised of a wide range of stocks, from small-cap stocks to megacap stocks. The index also includes stocks from domestic and international companies, ranging from technology, retail, and healthcare, to financial services and consumer products. Because of its wide range of components, the index is seen by some as a better representation of the overall stock market than the Dow Jones or S&P 500.

• Stocks: 3,000+
• Weights: Market-capitalization weighted
• Geographies: Domestic, International
• Industries: Technology, Retail, Healthcare, Financial services, Consumer products, etc.

Russell 2000 Index

The Russell 2000 Index is a stock market index created by FTSE Russell based on a capitalization-weighted indexing methodology. It’s used to measure the performance of the small-cap segment of the U.S. stock market. The Russell 2000 consists of the 2,000 smallest companies in the Russell 3000 Index of US stocks, including US small-cap companies.

Definition

The Russell 2000 Index is considered one of the best market measures for small capitalized companies in the United States. The index includes 2000 of the smallest common stocks listed on the New York Stock Exchange, NASDAQ, and the American Stock Exchange.

History

The Russell 2000 Index was created in 1984 by the Frank Russell Company (now part of FTSE Russell) as a representation of the small-cap space of the US stock market. It has since become one of the most widely used small-cap indices in the world.

Components

The Russell 2000 is composed of companies that are the smallest in the Russell 3000 Index, representing 8% of the total market capitalization of the Russell 3000. It’s an equity index that tracks the performance of small-cap stocks in the US. It captures the bottom 2,000 stocks by market capitalization. The stocks in the index are weighted according to their market capitalization.

• The minimum size requirement of a stock to be added to the index is $50 million.
• The average market capitalization is approximately $2.5 billion.
• The index is rebalanced and reconstituted twice a year by an independent committee.

Comparison of the Indices

When investors are trying to assess a market or measure the performance of a certain portfolio, they turn to stock market indices. These stock market indices are a way to measure the performance of a group of stocks. They are based on the weighted average of a selection of stocks that are usually sector-specific or market-wide. By comparing these different indices, investors can better understand the market and determine if stocks are undervalued, overvalued, or fairly valued.

Overview

The two most broadly known stock indices are the S&P 500 and the Dow Jones Industrial Average (DJIA). The S&P 500 is an index of 500 leading large-cap companies and is a good measure of the overall stock market. The DJIA is an index of 30 larger companies and tends to be a less volatile measure of the stock market.

Beyond these two major indices, there are other indices that measure different aspects of the market. These include the Nasdaq Composite, Russell 2000, and Wilshire 5000. The Nasdaq Composite is a benchmark index for the entire Nasdaq market and consists of over 3,000 stocks. The Russell 2000 and Wilshire 5000 are two indices that measure the performance of small-cap stocks. The Russell 2000 is composed of 2,000 of the smallest companies in the U.S. stock market and the Wilshire 5000 is composed of more than 5,000 publicly traded companies.

Pros and Cons

The advantage of using stock indices is that they provide a quick way to assess the performance of a market. They can also be used to compare and contrast the relative performance of different sectors, industries, and markets. They are also widely followed, giving investors an idea of where other investors may be investing.

The downside of indices is that they are market-cap weighted. They are not representative of all companies in the stock market, only the larger ones. This means that smaller cap companies may not be sufficiently represented and may not accurately measure the true performance of the market.

Conclusion

Stock market indices provide an important measuring tool for stock market performance, enabling investors to gauge its risk and returns versus other market metrics. With a diverse range of index metrics to choose from, investors can use these indices to compare global trends, track industry performance, and invest in individual countries and companies. This can help them make more informed decisions when it comes to protecting their investments, diversifying their portfolio, and seeking out potential opportunities.

Stock market indices can be a useful indicator of how well the overall market, or a specific segment, is doing. With a range of indices available, investors can get a comprehensive view into current trends, allowing them to identify potential opportunities or minimize their risk. Through the analysis of stock market indices, investors can make more informed decisions when it comes to their investments.