Stock Market Indexes
A stock market index is a statistical compilation of the performance of a number of representative stocks. Essentially, stock market indexes measure the overall performance of a particular market. Depending on the number and type of stocks selected, indexes can be used to analyze everything from specific sectors to entire countries. Because market indexes track overall market performance, they often serve as a portfolio benchmark or are used as investment vehicles themselves. Therefore, it is important to understand and be aware of various market indexes, both in the United States and abroad.
UNITED STATES MARKET INDEXES
The DJIA, which has been computed since 1896, currently consists of thirty large U.S. “blue chip” corporations. Companies included in the DJIA must to be adjusted over time to ensure that it serves as a solid indicator of the U.S. market. The DJIA is what is referred to as a price-weighted average, or an average which is computed by adding the prices of each stock included and dividing by a particular divisor. Therefore, fluctuations in the highest-priced stocks will have the most significant impact on the DJIA. Calculating the DJIA today is much more complicated because it must constantly compensate for stock splits, stock dividends, and adjustments in the thirty stocks it tracks. Although the DJIA is not the most comprehensive indicator of the overall U.S. market, it is certainly one of the most prominent.
The S&P 500 is an index representing 500 large-capitalization U.S. companies. It is regarded as a better index than the DJIA for two main reasons. First, the S&P 500 accounts for 500 corporations as opposed to the 30 in the DJIA, making it a superior gauge of the overall U.S. market. Second, it is a market value-weighted index. This means that its value is computed by calculating a weighted average of the returns of each included security, with weights proportional to outstanding market value. Because of these features, the S&P 500 is often used as the “market” benchmark to determine the relative success of investment portfolios. After all fees and transaction costs are taken into account, the majority of actively managed investment funds underperform the S&P 500 over the long term.
National Association of Securities Dealers Automated Quotations Composite
The NASDAQ Composite is often included along with the DJIA and S&P 500 in discussion of how the overall U.S. market is performing. Composed of approximately 3,000 companies, the NASDAQ Composite is valued on a modified market value-weighted index. It is especially known for tracking the performance of technology and growth companies, which often choose to list with the NASDAQ over other exchanges because it has more reasonable listing requirements. The NASDAQ experiences more trading volume per day than any other stock exchange in the world.
The Russell 2000 measures the performance of small-capitalization equities. While the DJIA, S&P 500, and NASDAQ Composite typically consist of larger-capitalization companies, the Russell 2000 excludes large stocks so as to accurately track the performance of small equity securities only. This index is unbiased and reevaluated annually to ensure that the approximately 2000 stocks included will be an accurate measure of overall small-capitalization performance.
Dow Jones Wilshire 5000 Total Market Index
Commonly referred to as the Wilshire 5000 or Total Market Index, this is the broadest index for the U.S. equities market. The Wilshire 5000 is a market capitalization-weighted index of all actively traded U.S. stocks. If you know of a public stock that is listed and has readily available price data, chances are it is included in this Total Market Index.
GLOBAL MARKET INDEXES
Financial Times Stock Exchange 100 Index (United Kingdom)
Consisting of the top 100 capitalized firms, the FTSE 100 is the premier stock index in the United Kingdom. These top 100 companies account for approximately 80% of the entire London Stock Exchange capitalization. The FTSE 100 is calculated with a market capitalization free float method and reorganized every three months.
Deutscher Aktien Index 30 (Germany)
The DAX 30 is a blue-chip index of the Frankfurt Stock Exchange. Created in 1987 and calculated every minute, this capitalization-weighted index tracks the performance of the largest companies in Germany.
40 out of the top 100 companies are selected to be included in the CAC 40 Index to serve as an accurate market benchmark. The CAC 40 Index is free float market value-weighted and reviewed quarterly by an independent third party. Although the CAC 40 is primarily associated with France, almost half of its listings are owned by foreign entities.
Tracking the values of 50 large-capitalization Chinese companies, the SSE Composite Index represents much of the Shanghai Stock Exchange. The SSE Composite Index uses a Paasche-weighted formula and consists of both A shares and B shares.
The Nikkei 225 is the featured stock index of the Tokyo Stock Exchange in Japan. Calculated since 1971, it is a price-weighted average of the largest Japanese stocks. The Nikkei 225 adjusts the included stocks annually to accurately reflect the Japanese market.
Established in 1969, the Hang Seng Index includes 45 companies in Hong Kong. The Hang Seng is designed as a market capitalization-weighted index that accounts for freefloat as well. Because the 45 companies included represent approximately two-thirds of the capitalization of the Hong Kong Stock Exchange, the Hang Seng serves as an excellent indicator of overall market performance.