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Measuring The Stock Market

There are a myriad of market indices, and it may seem like they are all measuring the same thing.

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Measuring The Stock Market

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  1. Every day we hear numbers that evaluate the stock market's performance, such as the Dow Jones Industrial Average or the NASDAQ Composite Index. There are a myriad of market indices, and it may seem like they are all measuring the same thing. However, each index evaluates the market in a different way.

  2. Dow Jones Industrial Average (DJIA) While the DJIA is often used to represent how the stock market is performing as a whole, the index is made up of only 30 large company stocks. Despite its name, the index is composed of more than just industrial companies. The index includes long established entities like General Electric and 3M as well as newer firms, such as Apple, Nike and VISA. The components of the index change from time-to-time, but it always includes stocks that are among the largest in the market. However, given that the index represents the performance of a very limited number of stocks, it may not signify what is happening in the broader market. The DJIA's value is calculated by adding up the price of all 30 stocks and then dividing it by a specific measure created by Dow Jones.

  3. Standard & Poor's (S&P) 500 Another reading of large company stock performance comes from the S&P 500 index. Many in the financial industry consider this a more accurate measure of broad market performance than the DJIA because it includes a much larger group of stocks. The index is made up of approximately 500 of the largest companies in the U.S. (currently, there are actually 504 stocks in the index). This is a "capitalization-weighted" index, meaning that price movements among larger stocks will have more impact on the index than price moves among smaller components in the index. However, the S&P 500 does not account for mid-cap or small-cap stocks' performance.

  4. NASDAQ Composite Companies that trade on a global electronic marketplace first established by the National Association of Securities Dealers (NASD) are included in this index. More than 3,000 common equities are listed on the NASDAQ exchange, including stocks, American depository receipts (ADRs) and real estate investment trusts (REITs). Some companies may be located outside of the U.S. The index's composition is largely made up of technology companies, so the performance of that industry can greatly influence the index. Like the S&P 500, the NASDAQ Composite is calculated using a market-cap weighting, with the 100 largest stocks accounting for most of its movement.

  5. Resources: http://www.affordablestock.com http://ezinearticles.com/?Measuring-The-Stock-Market&id=9341145

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