The three (3) most widely watched U.S. market indices are the Standard and Poor’s (S&P) 500, the DOW Jones Industrial Average and the NASDAQ.
Since analogies are a great way to explain concepts, I think that picturing the ten (10) Standard & Poor’s (S&P) market sectors as a vital signs monitor would be a graphic visualization. Not that I’m insinuating that the U.S. economy is a “patient”…. at least not right now.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 7.8 trillion benchmarked to the index, with index assets comprising approximately USD 2.2 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
Quote Source: Standard & Poor’s Index
Anyway, the S&P 500 index consists of ten (10) industrial/commercial sectors of publicly traded common stock. The ten sectors of the S&P 500 are:
- Consumer Discretionary
- Consumer Staples
- Information Technology
- Telecommunication Servies
On the other hand, the DOW Jones Industrial Average (the DOW) consists of only thirty (30) publicly traded stocks and they are not all industrial companies as the index name implies. The thirty (30) stock components (companies) do change, although not very often. A look at the history of Dow listings since inception in 1884 is an interesting “portal” into how the industrial age and new technologies changed the landscape of the United States over the last one hundred years. Just this year 2015, Apple Inc. was added to the DOW. The DOW Industrial Average is indexed by the price of each stock. Thus the Dow Jones Industrial Average (DJIA) changes daily and may move abruptly up or down based upon the price of each DOW “component.” Apple Inc. is such a highly priced stock at this point in time it can “move” the DJIA value up or down quite a bit just based on Apple’s pricing activity for the day! So even though there are 29 other corporate stocks on the DJIA index, Apple because of it’s high capitalization* can greatly affect the DJIA on any one day.
*DEFINITION of ‘Market Capitalization’
“The total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to sales or total asset figures.” Source: Market Capitalization Definition | Investopedia
The third market index I mentioned above is the NASDAQ. The NASDAQ is a very “technology heavy” index meaning many of the hardware/software and high tech publicly traded companies are listed here. The NASDAQ is actually an electronic stock exchange just like the New York Stock Exchange (NYSE), but the NASDAQ does not have a traditional physical trading floor like the NYSE does. To be listed on the NYSE, a company must meet certain capitalization criteria. Thus, new companies that become public many times list on the NASDAQ exchange first and then move to the NYSE after meeting its listing criteria. Some companies such as Apple and Microsoft still list on the NASDAQ even though they would qualify to be listed on the NYSE exchange. However, both Apple and Microsoft qualify to be listed on the Dow 30!