Indexes

 

Basics

Investors always want to know "what’s happening with the stock market?"  There is no one answer.  But many look to indexes as part of their analysis.  There are various indexes, which are a group of stocks selected, according to certain criteria, to represent a specific portion of the market, industry or asset class.  These are used to give investors a quick snapshot of the performance of the market.  It is like polling.  You can’t poll all the people in the U.S., so you take a representative sample.  It is one way to track the performance of the market or a specific sector.  You can also use indexes to measure the overall health of a sector and use it as a benchmark to compare a specific stock to.  Many of the indexes use market capitalization (see Market Capitalization), which is the size/value of the company.



Originally most indexes were based on an individual stock market or market capitalization.  However, now indexes are created to reflect numerous groups of securities.  These can range from a single country such as India to industry indexes such as railroads, drugs or computers.  Indexes are not restricted to just U.S. companies.  Major international indexes include the DAX (Germany), Hang Seng (Hong Kong), FTSE (U.K.), Nikkei (Japan), and TSX (Canada).

Also there are various index funds (see Index Funds) that individuals can invest in that represents a basket of all the stocks in a particular index.  Below are a few of the major U.S. market indexes that analysts look at to gage the direction of the market.

 

Dow Jones Industrial Average (DJIA)

This is the oldest, most widely quoted index, established in 1896.  It is used by most analysts and reporters to indicate the day-to-day direction of the market.  It is made up of only 30 "Blue Chip" companies (see Stock Labels Mostly Unofficial Stock Classifications), ones that are large, established, and stable.  These 30 companies make up 20-25% of the market value of the U.S. stock market.  Stocks in the index can change if a stock has significant financial difficulty and does not meet the criteria for the average.  The most recent change was in June 2009 when General Motors and Citigroup were replaced by The Travelers Companies and Cisco Systems.  Although it is the most quoted index, some experts dislike the idea of the DJIA since they think the use of only 30 stocks does not show the true picture of the broader market.  Dow Jones also produces other indexes for transportation, utilities, and global markets, to name a few.  Visit their website for more information
http://www.djindexes.com

 

Standard & Poor’s 500, 400, 600

Some experts prefer the S&P 500 index, which includes a representative sample of 500 leading companies in the leading industries in the U.S.  Although they focus on "large-cap" (largest market capitalized firms), they represent more than 80% of the stock market.   The S&P, like Dow Jones, has many other indexes.  For example the S&P 400 tracks 400 mid-cap stocks and the S&P 600 tracks 600 small-cap stocks.  Visit their website for information and the other indices they have:
http://www2.standardandpoors.com

 

Dow Jones Wilshire 5000 and 4500

These are products of Wilshire Associates and maintained by Dow Jones.  The Wilshire 5000 tracks all stocks on the New York Stock Exchange, The American Stock Exchange, and NASDAQ.  The Wilshire 4500 removes the S&P 500 companies from the list thereby focusing on medium and small capitalization firms.  Like the other companies they have additional indexes.  Their Website is:
http://www.wilshire.com/Indexes/Broad/

 

Russell 1000, 2000, 3000

These are indices produced by Russell Investments.  The Russell 3000 is an index of the 3,000 largest U.S. companies, based on total market capitalization and represents about 98% of the money invested in the U.S. market.  The Russell 1000 shows the largest 1,000 market capitalization corporations, and the Russell 2,000 represents small cap firms (3,000 minus the top 1,000).  They represent only 10% of the market capitalization.  Go to their website for further information.
http://www.russell.com.

 

NASDAQ 100

This is an index produced by NASDAQ which represents the 100 largest domestic and international non-financial securities listed on NASDAQ.  It includes companies in computer hardware and software, retail and wholesale trade and biotechnology companies.
http://dynamic.nasdaq.com/dynamic/nasdaq100_activity.stm