What is an Indices? In its simplest form it is a collective term for a section of the stock market. The most popular indices are generally a collection of the best performing stock in a particular country. Some countries have more than one prominent index and the differences being the type and amount of companies it uses to calculate its value.
Because there are many different indices in a many different countries, for this article I am going to focus in the main US stock indices.
The Dow (The Dow Jones Industrial Average)
The Dow also known as the DJIA. The Dow is calculated from the weighted average of 30 reliable and significant blue-chip stocks in the US stock market. The stocks used come from a variety of different sectors. These include Disney, Visa, 3M, Apple, Microsoft and Exxonmobil.
The Dow was originally founded in 1896 and at the time was made up of 12 industrial stocks. The Dow was invented by Charles Dow and Edward Jones and its purpose was to research market movements and analysis. The Dow is a weighted index, which means that the higher the price of a stock the more impact it has on the Dow’s movement.
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The S&P 500 (Standard & Poor’s 500)
The S&P 500 is compromised of the most popular and widely held US stocks. In order for a stock to be part of the S&P 500 it must fulfil the following criteria:
- Be a U.S. company with a market cap of at least $5.3 billion.
- It must have 50% of its stock owned by the public.
- Its individual share price must be more than $1.
- It must show positive earnings for 4 consecutive quarters.
The S&P 500 covers every sector in the US economy. In 2010 it was distributed in the follow way; Information Technology (17.8%), Financial (15.1%), Energy (12.7%), Industrials (11.3%), consumer staples (10.6%), Consumer Discretionary (10.6%), Materials (3.7%), Utilities (3.4%), Telecom Services (3.1%).
It differs from the Dow in that it does not contain as many large cap companies.
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The NASDAQ (National Association of Securities Dealers Automated Quotations)
The NASDAQ is actually two things. It is the name of a stock exchange in which stock can be traded much like the NYSE. It is also the collective term for all the stocks listed on the NASDAQ exchange and this is called the NASDAQ composite. The NASDAQ is synonymous with technology stocks but this is partly due to circumstance rather than it being its sole focus.
It has suffered several market crashes. The most high profile being when the tech bubble burst in 2000.
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The Russell 2000
The Russell 2000 is the bottom 2000 stocks that make up the Russell 3000. The Russell 2000 is a representation of the smallest stocks in the stock market based on capitalisation. It tracks the small cap companies that make up the stock market as a whole. The Russell 2000 is a good indicator of US growth.
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