Stock market indexes – What is its purpose?
Stock market indexes right around the globe are substantially powerful indicators for both global and country-specific economies. Although indexes are constructed in a variety of ways, they are more commonly defined by capitalisation and sector segregation.
Which are the major indexes in the US?
Three of the most followed indexes in the US are the Dow Jones Industrial Average (DJIA), S&P 500 and Nasdaq Composite.
- The Dow Jones
The DJIA is one of the most well-known, oldest and most frequented indexes in the world. It comprises of stocks from 30 of the largest and most influential companies in the US. The DJIA is a price-weighted index and it represents around a quarter of the value of the US stock market in its entirety. Even though the DJIA cannot be used as a representation of the broad market, it offers a representation of the blue-chip, dividend-value market.
- The S&P 500
This index contains 500 of the top US companies’ stocks, chosen for it primarily according to capitalisation. However, the constituent committee also bears in mind factors such as liquidity, public float, sector classification, trading history and the financial viability of the companies. Around 80% of the total value of the US stock market is represented by the S&P 500. It provides an adequate indication of movement in US markets holistically.
Most investors are familiar with Nasdaq through the technology stocks traded on it. The Nasdaq is a market capitalisation-weighted index and includes some companies not based in the US. The Nasdaq is heavily tech-weighted and includes numerous subsectors spread across the technology market, including software, biotechnology, semiconductors and more. Apart from this large portion of tech stocks, the Nasdaq also features some securities from other industries.