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Understanding major market indexes


Market indexes prove summary of overall market by tracking some of the top stocks on the stock market in the United States and they show in which direction the market is going. Indexes don't represent every company but selected portion of the market. Some indexes track small and mid cap companies, some large companies or companies within certain sector. Three major market indexes are Dow Jones Industrial Average, S&P 500 and Nasdaq. They differ in number of companies they track and calculations they use.

Dow Jones Industrial Average
It is the oldest market index of the three and some the most popular in the media.Journalist Charles Dow, founder of Wall Street Journal created the index that tracked the movement of the whole market, together with statistician Edward Jones on May 26, 1986. The original Dow Jones index had two industrial companies and ten railroads. He realized that two industrial companies are becoming more important and created a new Dow Jones index that consisted of almost all commodity based companies. In 1916 Dow Jones included 20 companies in the calculation and in 1928 that number was 30 as it is today. It takes stock price of 30 companies which best represents their industries. those companies comprise one quarter of all market value. Stock price of all companies are added up and divided by number of companies. Dow Jones Industrial average doesn't take into account the number of shares outstanding something that stemmed criticism. Nevertheless DJIA is considered measure of stock market health and investor's confidence in the market.

S&P 500
The index was introduced on March 4, 1957 and it tracks 500 large cap United States companies. It tracks the market capitalization of companies in the index, taking into consideration the all shares company has issued, but only that are available to the public. The bigger the market cap of a company the more representation they get in the index. Because it takes wider scope of companies, S&P 500 captures around 80% of stock market capitalization. Companies that are part of the index are rebalanced quarterly. Companies have to meet certain requirements, they have to be United States companies with market cap of at least 6.1 billion, with 50% of stock available to the public with minimum price of $1 per share. Company must file 10-K report, have half of the fixed assets and revenues in the United States and it must have four successive quarters of positive earnings.

Nasdaq
Nasdaq is not only the largest electronic equities exchange in the United States it is also the only exchange that tracks performance of all companies that are listed, more than 3000. Majority of companies on Nasdaq are tech companies so it is accepted as tech sector indicator. Nasdaq Composite index uses market capitalization like S&P 500 but Nasdaq doesn't restrict itself in calculation of only publicly available shares like S&P 500. Since it includes small and mid cap companies the Nasdaq composite is the most volatile one of all three.
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