Indexes are a key tool for investors. They allow you to benchmark your holdings and make decisions based on their performance.
They also help you to avoid over-reaching your portfolio if you are not sure where to place your money.
Typically, market indices are designed to represent broad swathes of the stock market. They may be based on market capitalization, industry type, size or a combination of these factors.
S&P 500
It is one of the most widely used market indicators.
In order to be included in the S&P 500, companies must meet strict criteria, including being U.S.-based and having a certain minimum number of shares outstanding. In addition, they must be subject to review periodically.
Some of these changes can have a significant impact on the value of a company’s shares. However, the committee tries to minimize this change as much as possible.
Inflation is a cause for concern because it can lead to higher prices and lower profits.
DJIA
The DJIA, or Dow Jones Industrial Average, is one of the most popular and widely followed stock market indices. It tracks the daily share price movements of 30 companies listed on NASDAQ and the New York Stock Exchange.
The index is price-weighted, which means that stocks with higher prices have more weight in the index than those with lower prices. This formula provides a consistent value for the index, which is important to investors.
In the past, Dow Jones would calculate the index by simply adding the average of all of its components’ share prices and dividing that number by 12. However, later on, they introduced a divisor to account for corporate activities that could skew share prices.
Critics of the DJIA argue that it is not representative of the broader market, and that it fails to reflect dividend returns. In addition, the index is based on price weights instead of conceptually superior market valuation weights, and it does not choose its component stocks systematically or regularly.
NASDAQ
The NASDAQ is the world’s largest electronic stock market and the second-largest by total securities values. It was founded in 1971 by the National Association of Securities Dealers (“NASD”) to make trading of stocks easier and more automated.
Today, the NASDAQ is an online marketplace for buying and selling securities across 29 markets in the U.S.
As technology has improved, the NASDAQ has become one of the most advanced exchanges in the world. It has developed automated trading systems, launched a website and stored records in the cloud.
Its index consists of more than 3,300 companies, making it an important barometer for the broader stock market and economy. However, its performance tends to be more volatile and riskier than the NYSE’s index because it is dominated by high-tech stocks.
Russell 2000
It includes 2,000 companies, each of which is worth less than a billion dollars by market cap.
It is a popular choice for mutual funds and exchange traded funds (ETFs) that are focused on small-cap stocks. It offers diversification, but can also be volatile.
This is because the smallest companies can be newer to the business and require a lot of capital to get started. This makes them more prone to price fluctuations and a greater risk for investors who are willing to take on the extra volatility.
Over the long term, small-caps have had more positive returns than large caps. In particular, small-caps have tended to outperform large caps during periods of economic turbulence.
