You may hear and read news about these stock market indices, but do you really know them?
The Dow
The Dow Jones Industrial Average is among the oldest, most well-known and most frequently used indices in the world. It includes the stocks of 30 of the biggest and most influential companies in the United States.
The Dow is what’s known as a price-weighted index. It was originally computed by adding up the per-share price of the stocks of each company in the index and dividing this sum by the number of companies – that’s why it’s called an average.
Quite unfortunately, it is no longer that simple to calculate. Over the years, stock splits, spinoffs, and other such events have led to changes in the divisor, making it a very small number, or less than 0.2.
The S&P 500
The Standard and Poor’s 500 Index, also known commonly as the S&P 500, is a bigger and more diverse index than the Dow. It is made up of 500 of the most wide traded stocks in the United States and it represents about 80 percent of the total value of the US stock markets. Generally, the S&P 500 index gives a good indication of movement in the US market place as a whole.
Since the S&P 500 index is market weighted (also called as capitalization weighted), every stock in the index is represented in proportion to its total market capitalization. In other words, if the total market value of all 500 companies in the S&P 500 slips by 10 percent, the value of the index also declines by 10 percent.
The Wilshire 5000
The Wilshire 5000 is also sometimes called the “total stock market index” or “total market index” since almost all publicly traded companies with headquarters in the United States that have readily available price data are include in the Wilshire 5000.
It was finalized in 1974 and this index is extremely diverse. It includes stocks from every industry. However, even if it is a very comprehensive measure of the entire US market, the Wilshire 5000 is referred to less often that the less comprehensive S&P 500 when people talk about the market as a whole.
The NASDAQ Composite Index
Most investors probably know that the NASDAQ is the exchange on which tech stocks are traded. The NASDAQ Composite Index is a market capitalization-weighted index of all stocks traded on the NASDAQ stock exchange. This index includes some companies that are not actually based in the United States.
Even though this index is known for its large portion of tech stocks, the NASDAQ Composite also includes stocks from the financial, industrial, insurance, and transportation industries.
The Russell 2000
The Russell 2000 is a market capitalization-weighted index of the 2,000 smallest stocks in the Russell 3000, which is an index of the 3,000 largest publicly-traded companies, based on the market cap, in the US market.
The Russell 2000 index gained popularity during the 1990s when the small cap stocks soared and investors moved more money to the sector. This index is the best known indicator of the performance of small companies in the market and it is not dominated by a single industry.
