American Stock Indexes — Learn About American Stock Indexes

American Stock Indexes — Learn About American Stock Indexes

If you are an investor you are probably familiar with American stock indexes. Even if you are not an investor, almost all evening news shows on TV and radio puts it in front of you by offering a quick one or two liner about the stock market’s performance for that particular day.

The most commonly quoted index is the Dow Jones Industrial Average. The announcer or TV personality will say something like “The Dow closed the day up, or down, XX points.”

Of course if you are not an investor, you really don’t care how the Dow closed. You don’t even care there are several more American stock indexes that receive a lot of attention from investors.

Investors use indexes as a gauge and a market timing tool. This article isn’t intended to explain these tools it is intended to describe the American stock indexes so you anyone interested can get a better understanding of what they are and how they are constructed.

On that note, we will start with the Dow. The Dow is the short name for the Dow Jones Industrial Average. It represents the performance of 30 of the largest companies that trade on the U.S. exchanges. They are selected for their leadership in their industries.

These 30 companies have approximately a $4.25 trillion market cap and represent a little below 20% of the total market capitalization of the combined New York Stock Exchange and the Nasdaq (see below).

The Dow has been in existence since 1896 and despite its critics it remains the most oft quoted of the American stock indexes. This particular index is an excellent source of stable paying dividend stocks if an investor is looking for strong and safe stocks that pay dividends. This index is not likely to get pushed out of the market indicating business any time soon.

Another of the American stock indexes that may be a familiar name is The S&P. It is actually the S&P 500 Stock Index and was created in 1957. Most financial gurus and investment advisors consider it to be the best proxy for the U.S. stock market.

The S&P is capitalization weighted and represents almost 70% of the total capitalization of the U.S. market. That means the bigger a stock’s market cap, the bigger its effect on the Index. In terms of dollars, the total market cap of the S&P is about $10.7 trillion.

The S&P doesn’t just go for the 500 largest companies. It is an index built to represent all sectors and industries. However, all the companies are relatively large.

The Nasdaq is both a trading exchange and an index. The index is the Nasdaq Composite Index. It is relatively new having been created in 1971. NASDAQ is an acronym that stands for National Association of Securities Dealers Automated Quotations. It is now the second largest stock exchange in the world by market capitalization.

Like the S&P 500, the Nasdaq Composite is a capitalization-weighted representation of the more than 3,000 equities listed on the Nasdaq Exchange. The Nasdaq Exchange seems to be the home to technology stocks and growth issues.

One could make a solid argument that the above described American stock indexes are the most important indexes an investor should follow. However that would be limiting an investor to only a short body of information.

The smart investor relies on the American stock indexes in conjunction with both technical and fundamental analysis tools to ferret out the investment, or investments that fit his goals and objectives. After all, investing is really about being as knowledgeable as one can be.

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