Understanding Stock Market Indices- What Stock Market Indices Tell About The Market – Part II

Most commonly used indices in the US market

The Dow

One of the oldest and most widely used index, the Dow Jones Industrial Average also called the Dow is said to be measuring the pulse of the market. Currently Dow includes 30 stocks each of which are the stock of the US’s most influential companies. Companies included in Dow are 3m Co, Alcoa, American Express ,AT&T , Bank of America Corporation, Boeing Co. ,Caterpillar, Chevron Corp, Cisco Systems, E.I. du Pont de Nemours and Company , Exxon Mobil ,General Electric Company ,Hewlett-Packard , Intel Corporation , International Business Machines , Johnson & Johnson , JP Morgan & Chase & Co , Kraft Foods Inc. , McDonald’s Corporation , Merck & Co, Microsoft Corporation , Pfizer Inc , The Coca-Cola Company , The Home Depot, The Procter & Gamble Company , Travelers Companies Inc , United Technologies Corporation , Verizon Communications , Wal-Mart Stores and Walt Disney Company. The index is a price weighted index thereby what impacts the index is the price of the stock irrespective of the weight it has in the index. Hence a $1 price change of a $20 stock is same as $1 price change of a $100 stock. The index makes adjustments for stock splits, spin offs and other transactions.

Currently the stocks included in Dow accounts for about a quarter of the total market value. Hence Dow is considered to measure the pulse of the market and is taken to be an important indicator of the overall economic climate and investor confidence.

S&P 500

As the name suggests this index tracks 500 of the most widely traded stocks. Thus it has more coverage than the Dow and hence is considered to reflect the market mood better than the Dow. Roughly it accounts for about 70% of the total market value.

Like majority of the indexes, the S&P 500 is a weighted index based on market capitalization in other words a market value weighted index. Hence changes in larger companies have a greater impact than stocks of the smaller companies in the index.

The Nasdaq Stock Market Composite

The Nasdaq Stock Market Composite is composed of all the stocks traded on the Nasdaq market. It is also a market value weighted index with high weighting given to technology stocks. Hence some of the big technology companies influence the index. It is more of a sector specific index and gives a good indicator of how the technology stocks are performing.

Russell 2000

Used for small-cap stocks this is the most common index used for mutual funds. This index tracks the performance of small cap to mid cap company shares . As of September 30, 2009 the average market capitalisation of companies in this index is $918 million.

Philadelphia Semiconductor

This price-weighted index tracks the performance of 17 U.S. companies that design, manufacture, and sell semiconductors.

Dow Transports

This stock index is specifically created for the transportation sector. The index is a weighted average of the stock prices of twenty transportation companies adjusted for stock splits and other factors.

Dow Utilities

Fifteen utility companies are covered in this index which provides an indicator of the movement in the utility sector.

NYSE Composite

This index tracks all shares listed on the New York Stock Exchange. Off the 2,000 stocks covered in the index, around 1,600 are from United States corporations and over 360 are foreign listings.

AMEX Composite

This index tracks all stocks traded in the American Stock exchange. Value of each stock is calculated by multiplying market price of stock with the number of shares outstanding.

Read more at: Understanding Stock Market Indices- What Stock Market Indices Tell About The Market- Part I