Up on Monday, down on Tuesday. Bullish today, bearish tomorrow. To the casual observer, there seems to be very little logic to the vagaries of the stock market. How can something that’s so important to our economy — not to mention your 401(k) — be so unpredictable? Truth be told, the stock market is often a guessing game; but with the help of market indices, you can at least make a more educated guess.
Putting your finger on the market pulse
It’s no surprise that markets are subject to fluctuations in the short run; we see this every day. Yet, their movement is also influenced by long-term trends. Market indices are basically indicators of what has already happened in the market, both short and long term.
By observing these indices, you can gain a better understanding of how the market works, which, in turn, can help you when it comes to tracking and managing your investments. Here’s an overview of the most recognizable market indices:
The Dow Jones Industrial Average
Also known as “the Dow,” this index tracks the prices of 30, large-company, U.S. stocks. Business reporters use the Dow to offer a quick, general indicator of overall market conditions. When you hear on the news “the Dow lost 8 percent of its value,” there’s a good chance a number of stocks not included in the Dow may have fallen, as well.
The Standard & Poor’s Composite Index of 500 Stocks
More commonly known as the S&P 500, this is another common market benchmark focusing on large companies. Primarily, it differs from the Dow in that it consists of 500 companies instead of just 30.
The Russell 1000
Another large-company index, the Russell 1000 focuses on the 1,000 largest companies in the U.S. The components of the index account for about 90% of the equity traded on the U.S. exchanges.
Specialized indices
There are other, more specialized indices that allow you to look at the stock market performance of particular industry groups or companies of a certain size.
The Dow Jones Utility Average and the Dow Jones Transportation Average
Also compiled by Dow Jones, these two indices specifically track utility companies (such as Edison International) and transportation companies (such as FedEx and CSX Corporation), respectively.
The NASDAQ Composite
NASDAQ stands for “National Association of Securities Dealers Automated Quotation System.” The NASDAQ Composite measures more than 5,000 U.S. and non-U.S. companies listed on the NASDAQ stock market.
The Russell 2000
This index measures the performance of 2,000 Small Cap companies, defined as those with a median market value of $500 million. The Russell 2000 consists of the next 2,000 companies in size after the largest 1,000.
Standard & Poor’s Mid Cap and Small Cap indices
These two indices track smaller companies. The S&P Mid Cap Index tracks the performance of 400 companies with a median market value of just under $2 billion. The S&P Small Cap Index tracks 600 companies with a median market value of $460 million.
Global indices
MSCI EAFE
The MSCI EAFE (Morgan Stanley Capital International-Europe Australia and Far East) index is made up of stocks from 21 developed markets, but does not include any stocks from the United States or Canada. This index is more than 45 years old and is considered the oldest international stock index. The MSCI EAFE is generally considered the most common benchmark of foreign stocks for U.S. investors.
FTSE 100
The FTSE 100 — often called “The Footsie” 100 — tracks the performance of the 100 largest companies listed on the London Stock Exchange. FTSE stands for the Financial Times Stock Exchange, a company that is a subsidiary of the London Stock Exchange. The FTSE 100 is the most widely followed British index.
We’ve just scratched the surface here, so if you’d like to know more about indices, please log on to the Securities and Exchange Commission’s website at sec.gov or visit the NASDAQ website at nasdaq.com.
