"How's the market doing?" If youre a typical stock investor, youd answer, "Its up ten points today." Most stock investors know that you are referring to the Dow-Jones Industrial Average (DJIA Index) being up ten points, say from 5000 to 5010.
At one hundred years old, the Dow is the most well-known stock index (yardstick) in the world. What is the Dow? The Dow is an average of thirty bellwether stocks listed in the New York Stock Exchange (NYSE). What does the Dow do? The Dow is a yardstick by which the public can measure the overall performance of the stock market in the United States. The value of the Dow Index started at 86 in 1885 and surpassed 10,000 in March 1999.Click here for "How the Dow is calculated?"
Each of the thirty Dow stocks is made of large (blue-chip) companies such as IBM, GE, AT&T, Coke, Disney, and McDonalds, which represent different segments of the economy such as food, computers, and entertainment. Together, these thirty companies represent the US stock market as a whole.
The Dow also has two sisters: the Dow
Jones Transportation Index and the Dow
Jones Utilities Index. These indexes are the bellwether indicators for the
transportation and utility sectors of the US economy.
Standard & Poors Corporation has developed an S & P 500 index, which is a benchmark widely used by professional stock investors. Of the 500 stocks in the index, 425 are industrials, 25 are railroads, and 50 are utility companies. It is interesting to note that the software giant, Microsoft, was an S & P newcomer in 1994.
Other Major Indexes
The NASDAQ Index measures price movement of all domestic common stocks listed on the NASDAQ, the computer network stock exchange. The index also contains six industry indexes: industrial, bank, insurance, other finance, utility, and transportation.
The AMEX index measures the price movement of all common stocks on the American Stock Exchange.
The Russell 2000 measures the price movement of 2,000 small companies.
Wilshire Associates in Santa Monica, California, has compiled the largest comprehensive index of nearly 7,000 stocks. The S & P 500 Index comprises about seventy percent of the value of the stocks in the Wilshire 5000.
Note : Although these popular stock indexes are convenient yardsticks for measuring
movement of the market, they do not account for the reinvestment of dividends. A stock
investor should include the reinvested dividends to judge the total return of his stock
investments in the long-run.