Indexes 101

2/16/2022

Thomas E. Kersh

     Many new investors and average Americans will see something on the news about the stock market. Then they’ll hear about the NASDAQ's price or how much the S&P 500 has dropped or what’s happening with the Dow today. So what are Indexes? What purpose do they serve? Which ones should I pay attention to? How can I use Indexes? These are all important questions so i'll answer them and give you a little more insight.

     What is an index? An index is a way of statistically measuring the change in the securities market. In other words, measuring how well or poorly a specific market is doing. 

     We’ll use the S&P 500 as an example. This index was created in 1957 measuring how well the top 500 (technically 505) American companies are performing in real-time. This means this specific index is great for measuring how the American stock market is doing in real-time. 

     There are also foreign indexes that track foreign markets like the English index FTSE 100 which measures the top 100 publicly-traded companies in the United Kingdom.

So what is the index or indexes that you need to watch as an American investor? It’s real simple: the DOW, the NASDAQ, and the S&P 500. I already went over the S&P 500 and why you should keep a close eye on it. 

     The Dow Jones Industrial Average is the oldest index having been created in 1885 as Dow Jones Average but would change in 1896 to the Dow Jones Industrial Average. This index tracks the 30 largest publicly-owned companies trading on the NYSE (New York Stock Exchange) and the NASDAQ (National Association of Securities Dealers Automated Quotations). This allows for more of a separation from the stock market and allows investors and traders to track more of how the American economy is doing in real-time. 

     The NASDAQ Composite is an index created in 1985.  It’s the younger brother to the other two indexes mentioned. It tracks all of the companies traded on the NASDAQ both in the United States and from overseas. This index has holdings in the thousands. As of April of 2021, there were 3,097 holdings in the NASDAQ Composite. This index is great for tracking how the stock market and markets around the world are doing. But something important to note about the NASDAQ Composite is that it does tend to lean more into the information technology sector with many of its holdings. So if you would like to track other things, there are smaller NASDAQ indexes like the NASDAQ-100 which tracks nonfinancial companies from the NASDAQ Composite.

     So you now know what indexes are and why traders and investors use indexes. You also now know how to use them and what the main three  indexes track. What I would recommend for you is to pay more attention to the S&P 500 and the NASDAQ Composite since most ETFs have their holdings from these two indexes allowing you to measure more of how your portfolio is doing rather than the American economy or various exchanges.