Every day, you may hear people talk about what the ‘market’ has done recently. So, what exactly is the market, and what are people referring to when they use this term? The answer may seem complex at first but will make much more sense as we take a deeper dive.
What people are usually referring to is the performance of an index. An index, in this context, is a collection of investments pooled together to track the performance of the group as a whole. This allows investment professionals and individual investors alike to see the activity of a larger group of investments, as opposed to checking individual investments one at a time. Indices can track all types of investments, ranging everywhere from bonds to currency to real estate. When someone talks about how the ‘market’ is doing, they often are referring to one of two indices: the Dow Jones Industrial Average Index and the S&P 500 Index.
COMMON STOCK MARKET INDICES
DOW JONES INDUSTRIAL INDEX
The Dow Jones Industrial Average (commonly referred to as “The Dow”) is one of the most commonly referred-to stock market indices, consisting of 30 large, well-known companies across several different industries. This is often the index that news sources will point to when they say something along the lines of “the market dropped 200 points today.” While many news sources will talk about the Dow and the stock market as if they were interchangeable, the Dow, while important, only tells part of the story. It can indicate the general direction of the stock market, but it’s important to clarify that the Dow is not the same as the entire stock market.
S&P 500
The S&P 500 includes 500 of the largest companies in the United States, covering all 11 major industries in the economy. Because it includes 500 companies instead of 30, the S&P 500 provides a broader view of the stock market than the Dow. (All 30 members of the Dow are also part of the S&P 500). The 11 industries included in the S&P 500 are as follows: Information Technology, Healthcare, Financials, Consumer Discretionary, Consumer Staples, Energy, Industrials, Materials, Utilities, Real Estate, Communication Services. This index is weighted by market capitalization (total value of the company), meaning the largest companies have the most effect on the index. As a result, the performance of the largest company affects the index more than the smallest company.
OTHER COMMON INDICES
NASDAQ COMPOSITE — The Nasdaq Composite tracks over 3,000 stocks listed on the NASDAQ stock exchange, primarily consisting of technology and innovation companies.
RUSSELL 2000 — The Russell 2000 tracks the performance of smaller public companies (usually companies worth between $300 million and $2 billion).
BLOOMBERG U.S. AGGREGATE BOND INDEX — One of the most common bond market indices, tracking U.S. investment-grade bonds, U.S. Treasuries, and mortgage-backed securities.
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Zeiser Wealth Management, LLC provided this article. To learn more about ZWM visit https://www.zeiserwealth.com. Investment advisory services offered through Zeiser Wealth Management LLC, a state of Arkansas Registered Investment Advisor. This material was prepared by Carson Coaching. Carson Coaching is not affiliated with Zeiser Wealth Management.