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 Market Mysteries of the week

  The Dow, the S&P, and the Nasdaq What are they, and why are they different?

Answer : They’re all indexes that track the value of different sets of companies.What’s an index?Indexes are just numbers, calculations of something people are trying to keep track of. Think about a Body Mass Index (BMI) or a Heat Index. Stock market indexes help us track the changes in the value of a particular set of companies. There are major indexes that everyone uses to follow broad sets of companies. But there are also endless smaller indexes because people might want to track groups of companies by industry or other characteristics.Overall, the absolute numbers themselves aren’t that important. It’s more about observing the direction and magnitude at which they’re moving.What is the S&P 500?The Standard & Poor's 500 Index is the most widely adopted index for tracking “The Market” in the United States. It essentially tracks the value of the biggest 500 public companies in America. While there are about 4,000 public companies in the US, the others are much smaller. The biggest 500 make up about 80% of the total value of the total ~4,000 companies.The S&P 500 is used as the main benchmark for returns for US investors. The growth of the S&P 500 index is essentially the average growth of all investable companies. The index is weighted by market capitalization, which means the bigger the company, the higher the weighting in the index. So the monster tech companies Apple, Microsoft, Amazon, Facebook, and Alphabet (Google) combined makeup over 20% of the value of the index. The other 495 make up the other 80%. So as Big Tech moves, so does “The Market”.Why do people talk about the Dow?The Dow Jones Industrial Average is more for the older folks. It was created in the 1800s and only tracks 30 stocks selected by a committee as the most established, stable companies of the economy. They’re saying, “these are the 30 companies that matter”.Historically, the index components have leaned more stable, less growth-focused in nature, with companies in construction, infrastructure, energy, and banking. In recent years it’s added more tech companies like Apple and Microsoft that considered more core infrastructure. And the Nasdaq?The National Association of Securities Dealers Automated Quotations, aka Nasdaq for obvious reasons, is the only one of these that references an actual stock exchange. The Nasdaq and the New York Stock Exchange (NYSE) are the two main places where stocks are actually bought and sold. The NYSE is the largest exchange, dating back to the 18th century, and is the place where all those Wall Street guys were screaming trades at each other. The Nasdaq came onto the scene in the ’70s and got popular in the tech boom of the ’90s for being more of a technology-based exchange. By nature of that, the companies that list on the Nasdaq are younger and lean more towards technology.The Dow and the S&P 500 both track companies on both exchanges. But the Nasdaq Composite Index tracks only the companies that are listed on the Nasdaq exchange. The Nasdaq 100 Index is another popular one that tracks the biggest 100 companies on that index, making up about 90% of the value of the ~5,000 companies listed on the Nasdaq exchange.The Nasdaq 100 does not include financial companies and the majority of the stocks are explicitly in the technology sector, or heavily tech-enabled like Amazon. Apple, Microsoft, Amazon, Facebook, and Alphabet (Google) combined makeup over 40% of the value of the index, add Tesla to get to about 45%. Why these three?So while there’s plenty of overlap in the constituents of these indexes, their history and styles have led them to have divergent performance. Investors see the S&P 500 as the main “average”. The Dow is more of the stable, industrial, “value” companies. The Nasdaq is more of the tech-focused “growth” companies.Their performance is a good indicator of how investors are feeling- whether they’re excited about innovation and long-term growth or looking for more stable profits and dependability. What are index funds?Indexes are just numbers, used to track the value of these companies. You can’t invest in a calculation. However, big financial companies like Vanguard and BlackRock solved that problem by pooling together billions of dollars into a fund to buy every stock in the indexes. Then, they let us buy a share of their fund. So when we buy a share of an index fund, or Exchange-traded fund (ETF), our money gets spread out and invested into every company in that particular index. The performance and growth of our investments should follow the performance of the index closely.Please feel free to forward this to anyone who might find this interesting.💙 The Scoop Team

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