Explore the intricacies of stock market indexes in the United States and how they powerfully indicate global and country-specific economies. Gain an understanding of the construction and composition of the three most followed indexes: S&P 500, Dow Jones Industrial Average, and Nasdaq Composite.
Key Insights
- Stock market indexes are influential indicators for global and country-specific economies, with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite being the most broadly followed in the United States.
- Apart from these three, there are approximately 5,000 other indexes that make up the U.S. equity market.
- Indexes are typically identified by capitalization and sector segregation and form the basis for passive index investing, often done through exchange-traded funds.
- The Standard & Poor’s 500 Index comprises 500 of the top U.S. companies, representing approximately 80% of the total value of the U.S. stock market.
- The Dow Jones Industrial Average includes the stocks of the 30 largest and most influential U.S. companies, representing about a quarter of the U.S. stock market.
- The Nasdaq Composite Index is a market-capitalization-weighted index of all the stocks traded on the Nasdaq stock exchange, including some companies not based in the United States and is heavily tech-weighted.
Major Stock Indexes
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S&P 500
500 largest US public companies, market-cap weighted.
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Dow Jones (DJIA)
30 large US companies, price-weighted (older methodology).
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NASDAQ Composite
All NASDAQ-listed stocks, tech-heavy.
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Russell 2000
Small-cap US stocks — broader market exposure.
- Stock market indexes around the world are powerful 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 broadly followed indexes by both the media and investors
- In addition to these three indexes, there are approximately 5,000 others that make up the U.S. equity market
- Indexes can be constructed in a wide variety of ways but they are commonly identified generally by capitalization and sector segregation
- Investors of all types use indexes as performance proxies and allocation guides. Indexes also form the basis for passive index investing often done primarily through exchange-traded funds that track indexes specifically
3 main stock indexes:
S&P 500
- The Standard & Poor’s 500 Index is an index with 500 of the top companies in the U.S. Stocks are chosen for the index primarily by capitalization and 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
Dow Jones
- The Dow Jones Industrial Average (DJIA) is one of the oldest, most well-known, and most frequently used indexes in the world
- It includes the stocks of the 30 largest and most influential companies in the US
- It is a price-weighted index
- The DJIA represents about a quarter of the US stock market
- The Dow Jones is known for its listing of the U.S. market's best blue-chip companies with regularly consistent dividends
Nasdaq
- The Nasdaq Composite Index is a market-capitalization-weighted index of all the stocks traded on the Nasdaq stock exchange
- This index includes some companies that are not based in the US
- Known for being heavily tech weighted, this index includes several subsectors across the tech market including software, biotech, and more
Conclusion
Indexes play an important part in the overall analysis of the U.S. equity market. Indexes and their movements provide a great deal of insight into the economy, the investing public’s risk appetite, and the trends for investing diversification. In general, understanding the nuances of their construction and composition can be essential for making all types of investment decisions.
