There are numerous stock market indexes. They are generally used as a method of measuring a section of the stock market and are often used as the source of information given in news reports or financial services firms. It is not uncommon for companies and stocks to switch from being listed on one index to being listed at another. You can purchase stocks from a company that is on the NYSE (New York Stock Exchange) and that same company might be listed on the DJIA (Dow Jones Industrial Average) before all is said and done. Here are the differences between the major US stock indices.
Dow Jones Industrial Average (DJIA)
Made up of thirty large, publicly owned companies in the US, the DJIA is one of the oldest market indices, second only to the Dow Jones Transporation Average, also created by Dow. It was created by Charles Dow, Wall Street Journal editor and Dow Jones & Company co-founder. Each year, the editors of the Wall Street Journal pick the companies to be listed in the index each year.
The industrial portion of the name is historical. In it’s beginning during the industrial revolution, the top eleven companies were the top industrial companies. This is not the case any longer. Currently, the thirty companies that are listed in the index are at the top of their industry.
The NASDAQ, Primarily used track technology stocks, accesses market value of a company, including the company worth of all five thousand stocks listed on the exchange. Many of the technology based companies have overseas factories and plants, so the NASDAQ exchange is not exclusive to the United States. It is considered a primary benchmark of the performance of tech companies. The majority of the companies tracked by the NASDAQ are smaller companies, which causes the index to be more volatile, based on the companies performance.
The S&P 500 (Standard & Poor 500) lists only US based companies. If a company moves it’s headquarters overseas, it will be removed from the S&P 500 index to be replaced by a US company. The stocks listed in the S&P 500 are all large-cap common stocks that are traded actively on either the NYSE or the NASDAQ. Considered a chief indicator of the state of the US economy, the S&P 500 is the most widely followed index, after the Dow.
As you can see, there are many differences between the indices, but there are also quite a few similarities. Each index is chosen by different people who feel that the best way to track the economy is through the stocks they have listed on the index.
Each investor must choose the index that complements their financial status and beliefs best. While you don’t need to be as knowledgable as a stock broker, it is wise to learn enough to try to analyze the economic health of the stocks you are interested in purchasing.