What You Should Know About The Stock Indexes

There are numerous stock indexes and each one is different; being cited by news or financial service firms these indexes are often used to benchmark the performance of portfolios. Not only are these indexes different, but stocks and companies move in between them all the time, allowing us to measure a certain section of the stock market. While you might purchase shares off the New York Stock Exchange (NYSE), that same company might be listed on the Dow Jones Industrial Average (DJIA) by the time it is all said and done. Let’s take a look at some of the major US stock indexes and see what sets them apart.

The Dow Jones Industrial Average is a market index of 30 large, publicly owned companies based in the US. The editors of the Wall Street Journal pick the companies listed in the DJIA each year; a tradition that was started in 1896 by Charles Dow and his partner Edward Jones. The Dow is one of the oldest US market indexes, second only to its brother index, the Dow Jones Transportation Average.

While one would think the companies listed were still industrial-based companies, this is not the case. During the early 1900s in the industrial revolution, this index was based on the top 11 companies, which just so happened to be the major industrial hitters. Since then, times have changed and industry is no longer the only top seat in the market, but the ranking has not changed; the 30 companies listed are at the top of their game in their respective industry.

The NASDAQ index is mainly used to track technology stocks, as well as some high dividend yield stocks, unlike the Dow, the NASDAQ takes into account the market value, including company worth, of all 5000 stocks listed on the exchange. It is highly followed in the US as a key indicator of the performance of technology companies and since many of the tech-based companies have plants and factories overseas, it is no longer considered an exclusively US index. One of the key complaints for the NASDAQ is the index tracks a majority of small companies, which increases the index’s volatility based on their performance.

The Standard & Poor 500 is a strictly US based index; meaning when a company shifts it’s headquarters overseas, it is removed from the index and replaced by a company still located in the US. The stocks included in the S&P 500 are all large-cap common stocks actively traded on either of the two largest American exchanges; the NYSE and the NASDAQ. After the Dow, the S&P 500 is the most widely followed index and is considered a bellwether for the American economy.

While all of the indexes are different in what they follow, there is a good number of similarities between them. Each index is picked by a different set of individuals who feel the best way to track an economy is through the stocks they have listed on the index.

It is up to the person who is investing to figure out which index suites their beliefs and financial status the best. Investing in the stock market doesn't require you become as knowledgeable as a broker, but it helps to know the basics.