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 Index, 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 Smart 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.
