What exactly do we mean when we say “The Stock Market”?
Whether you are just getting started in the stock market or an experienced investor, there are some basic things you should know about the stock market. When investors refer to “the stock market”, they generally mean the largest US indexes that measure the daily price movements of US public companies. However, many do not realize how broad and varied the “US Stock Markets” are.
S&P 500 Index
The Standard & Poors’ 500 index is the leading economic indicator in the United States. It measures the performance of the 500 largest U.S. public companies which, added together, comprised over $40 trillion in market capitalization in early 2022.
To be included in the S&P 500 index, a company must meet certain criteria. These include having common stock that is traded on the New York Stock Exchange or the NASDAQ. A company must also be based in the United States and have positive earnings for the last four consecutive quarters upon entry. It must also have at least 50% of its revenues and fixed assets in the United States.
The S&P 500 is a weighted index, meaning that companies that have more market capitalization will receive more weight in the index. A company’s “market cap” is calculated by multiplying its number of outstanding shares by its current share price. A company’s market cap must be at least $14.6 billion to be included in the index.
As of August 2022, the nine largest companies on the list of the S&P 500 accounted for nearly 28% of the market capitalization of the index and were, in order of highest to lowest weighting: Apple, Microsoft, Alphabet, Tesla, Berkshire Hathaway, United Health Group, Johnson & Johnson and Exxon Mobil. The companies that have increased their dividends in 25 consecutive years are known as the “S&P 500 Dividend Aristocrats”.
Dow Jones Industrial Average
The Dow Jones Industrial Average has been one of the most popular indicators that have served as a proxy for the broader U.S. economy for nearly a century.
The Dow Jones Industrial Average (DJIA), also known as the Dow 30, is a stock market index that tracks 30 large, publicly-owned, “blue-chip”, stable, and well-recognized corporations trading on the New York Stock Exchange (NYSE) and Nasdaq. The Dow Jones is named after Charles Dow, who created the index in 1896 along with his business partner Edward Jones.
The DJIA is a price-weighted index. This means that stocks in the index with higher share prices have greater influence, regardless of their size in terms of market value.
The DJIA’s composition can change over time based on economic trends. During the 1900s the Dow was made up of companies like Western Union Telegraph Company and US Leather Co. that made horse bridles and accessories for the horse-drawn carriages of that era.
The index has evolved over time to include today’s leading industrial and technology companies such as Apple and Salesforce. All companies are required to be headquartered in the United States.
The Nasdaq 100 Index is a basket of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.
The index is constructed on a modified capitalization methodology. A large portion of the index covers the technology sector, which accounts for 56% of the index’s weight which has helped drive strong returns for the past two decades.
Russell 2000 index
Whether you’re an investor looking for a smooth ride or a riskier way to invest, the Russell 2000 index offers you the opportunity to take advantage of the small and mid-cap segments of the US equity market. The index tracks 2,000 of the mid and small-sized publicly held companies.
The Russell 2000 is considered the benchmark for smaller U.S. companies, and several mutual funds and ETFs use the index as a measuring stick for performance.
The Russell 2000 is divided into several subindexes. These subindexes are calculated based on factors such as return on assets, earnings volatility, and debt. Each subindex may be more or less sensitive to economic cycles.
FT Wilshire 5000 index
Whether you’re a conservative investor, a volatile investor, or just an investor interested in the stock market, the FT Wilshire 5000 Index is an important piece of information. It is the market value of all publicly traded stocks in the United States.
The FT (Financial Times) Wilshire 5000 Index represents more than 99% of the equity market in the U.S. It is a comprehensive measure of the U.S. stock market and provides a more comprehensive measure of market value than other indices.
The index includes approximately 3,500 companies. To be included in the Wilshire 5000, a company must be based in the United States, have a presence on a major stock exchange, and offer pricing information that is widely accessible to the public.
The Wilshire 5000 is comprised of a full-cap version and an equal-weight version. The full-cap version weights component companies by total market cap. The equal-weight version gives every company in the index an equal weight in the calculation.
But that’s not all!
The US financial systems also include deeper reservoirs of listed securities, including “over the counter” markets with over 11,500 securities listed as of 2022! That does not even include yet another group of the tiniest, most dangerous stocks in the “penny stocks” and “in bankruptcy” markets.
So next time someone asks you what you think about the market, you can whip out a retort: “Oh! Well, which market? The S&P 500? The DOW? The Nasdaq? Or perhaps you mean the Russell 2000 or the Wilshire 5000?”
It’s your prerogative to be smart!
Indeed, no matter how much investors know about the markets, there is always more to learn!
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DISCLAIMER: This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice. Investing involves risk, including possible loss of principal. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness.