A stock market index measures how well certain stocks are doing. They usually use the weighted average of the prices of each individual stock to get this index price. The index describes the trends of those specific securities, and thus shows the overall trends of that industry or market. It’s a good indicator of how the economy is doing overall.
Popular indices include the S&P 500 and the Dow Jones. The first follows the top 500 largest companies traded in the United States Stock Exchanges. The latter follows the top 30 stocks and their prices. Both are widely followed, so the next time you hear “the market is up today…” know that it is referring to the Dow Jones or the S&P 500.
Stocks fluctuate daily. The end-all and the be-all when it comes to observing the changes in the markets, the three major indices all provide a different metric to determine how the market is performing—the Dow Jones and Nasdaq. Here are the differences between the two:
The National Association of Securities Dealers Automated Quotations is weighted by Market Capital or the value of the company (stocks bought X price of a stock). There is no categorization of the over 4000 stocks being listed, so often times the value is determined by how the tech sector is performing. Whenever you look at NASDAQ on Google, you are actually viewing the NASDAQ composite; NASDAQ is a stock exchange.
This index is measured by how the top 30 stocks are performing. Given these are the only stocks that really influence an index, people trust it. They are weighted by the price of the security rather than market capital. It is also the oldest and arguably most reliable.
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