When a reporter says, "The Dow closed at 11,477 today, up 48 points," you know she's talking about the stock market, but you may not be entirely sure what the Dow is or why it makes the daily news. A stock market index, such as the Dow, is a tool investors use for comparison with their own stock portfolios. Stock market indexes provide valuable information about the stocks of companies that you may be evaluating. The stock market indexes most often reported are the Dow Jones Industrial Average -- often called the "Dow" -- the S&P 500 and the NASDAQ.
Learn about the major stock market indexes. The Dow, S&P 500 and NASDAQ indexes are the most common because they are good indicators of the performance of the overall stock market. The Dow is made up of 30 stocks for large companies such as Wal-Mart and Microsoft. While the Dow is more often reported, the S&P 500 is regarded as the best gauge of the stock market’s large public companies. The S&P 500 is made up of 500 companies that are market leaders. The Nasdaq Composite index tracks the 3,000 stocks traded on the Nasdaq stock exchange. Hundreds of other stock market indexes measure specific parts of the market, such as the European or emerging markets.
Find a stock market index that fits your investment objectives. The Dow and the S&P 500 indexes will follow a cyclical pattern as the economy grows and contracts. Some investors prefer this pattern, as they believe the economy follows a generally predictable pattern. Others prefer more volatile investments with the potential of a large return and are willing to take more risk. These investors would choose a stock market index that follows technology stocks or emerging markets.
Compare your investments with the index that most resembles your investment profile. Understanding the different indexes will help you understand how to measure the performance of a stock. For example, a Fortune 500 company’s stock might be compared with the S&P 500 index. A stock for a technology company might be compared with the Nasdaq Composite.
Sara Huter is a professor of economics. Her background also includes risk management in the banking and energy industries with expertise in credit scores. Huter received an M.B.A. in finance from Texas A&M University and a B.S. in information systems from Kansas State University. She has been writing for over five years with work at Popsyndicate.com, WickedWordSmith.com and Simplejoy.com.