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- Scoop Market Mysteries 8-14-22 (Indexes)
Scoop Market Mysteries 8-14-22 (Indexes)
🔎 Market Mysteries: What's the difference between the Dow, the S&P 500, and the NASDAQ?
Market Mysteries of the week
The Dow, the S&P 500, and the Nasdaq What are they? How are they different?
Answer :
They're all indexes that track the stocks of different sets of companies.
What's an index?
Indexes are just numbers
or calculations of something people are trying to track. Think about a Body Mass Index (BMI) or a library book index code.
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 there are endless combinations of companies to track. There are indexes to track groups of companies by industry, valuation, environmental risks, social risks, and many other characteristics.
Overall, the absolute numbers themselves aren't that important.
It's more about observing the direction and magnitude 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 follows 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 ~4,000 companies.
US investors use the S&P 500 as the primary benchmark for returns.
The growth of the S&P 500 index represents the average growth of America's biggest companies.
S&P weights the index by market capitalization, which means the larger the company, the greater the weighting in the index. So the monster tech companies Apple, Microsoft, Amazon, Tesla, and Alphabet (Google) combined make up over 20% of the value of the index. The other 495 make up the additional 80%. So as Big Tech moves, so does "The Market."
Why do people talk about the Dow?
is more for the older folks. It was created in the 1800s and
only tracks 30 stocks selected by a committee as the economy's most established, stable companies.
They're saying, "these are the 30 companies that matter".
Historically, the index components have leaned towards more stable, less growth-focused companies in construction, infrastructure, energy, and banking. In recent years the Dow has added tech companies like Apple and Microsoft that are considered more core infrastructure.
And the Nasdaq?
The
, 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 (
) are the main places where stocks are bought and sold. The NYSE is the largest exchange, dating back to the 18th century, and is where all those Wall Street guys were screaming trades at each other. The Nasdaq came onto the scene in the '70s and grew popular during the '90s tech boom as a technology-based exchange. By nature of that,
the companies that list on the Nasdaq are younger and lean more toward the tech sector.
The Dow and the S&P 500 track companies on both exchanges. But the
tracks only the companies listed on the Nasdaq exchange. The
is another popular one that follows 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 most stocks are in the technology sector or heavily tech-enabled like Amazon. Apple, Microsoft, Amazon, Tesla, and Alphabet (Google) combined make up over 40% of the index's value.
Why these three?
While there's plenty of overlap in the constituents of these indexes,
their history and styles have led them to have divergent performances
. 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.
Our investments' performance and growth should follow the index's performance closely.
Now, when you see that next headline about one of these indexes dropping, you'll know what it means.
💙 The Share Scoops Team
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