What does it mean when the Dow Jones or NASDAQ "has dropped" or "raised" by so many points. There is a composite index for each of these exchanges that attempts to express how the market is selling, a mixed bag of stocks that retains the same mix over a period.
If an index happened to be at 10,000 points at the start of a day and went to 11,000 points at end of day, it would be said to have raised by 1000 points or 10% (one heluvalot)
if the index had been at 20,000 points and went to 21,000, the same 1000 point increase woulod be only 5%, (still a heluvalot)
The number of points rise or fall is less significant than the percentage change. But the actual value of an index makes it easier to compare high points in the roller coaster ried of the market. It gives a basis for a graphical representation. It means I'm a hell of a lot poorer lately people buy and sell on stock exchanges and NASDAQ and dow jones are 2 stock exchanges.
When people are confident the economy is going well they buy shares which makes the exchange gains point.
When people think the economy is going badly, they sell shares and the exchange loses points. The Dow and the NASDAQ are indexes. The Dow is a price weighted index. with 30 stocks. The NASDAQ is a composite index of all the stocks on the NASDAQ exchange, which is several thousand. The Dow is a price weighted index. To calculate it they add up the prices of the 30 stocks and divide by a divisor, which accounts for stock splits and dividends. The NASDAQ is calculated using the market capitalization of the stocks. In other words the market value of the companies. An index has no units. They're just points. But, the points indicate a change in the values of stocks. Its not the absolute value thats important with an index, its the change. Is the Dow up or down? The index is calculated 鈥渙n the fly鈥?during trading to give investors a sense of direction to the market it represents.
Notice, I said the index reflects 鈥渢he market it represents,鈥?not 鈥渢he market.鈥?
Most stock indexes, even those quoted as representing the total market, only reflect a portion of the actual market.
Here are the most popular indexes and the markets they reflect.
The Dow
The Dow Jones Industrial Average is the oldest and most widely known index. It is also the most widely quoted index and, mistakenly, considered the market barometer.
Originally, it was a simple average of the stocks in the index, but thanks to stock splits, spin offs and other transactions, more sophistication is now required.
The Dow currently has only 30 stocks. However, each of these stocks represents one of the most influential companies in the U.S. and all have annual revenues in excess of $7 billion.
The Dow is the only major index that is price weighted, which means if a stock鈥檚 price changes by $1, it has the same effect on the index regardless of the percent change for the stock. In other words, a $1 change for a $30 stock has the same effect as a $1 change for a $60 stock.
The Dow stocks represent about one quarter of the value of the total market, so in that sense it is a factor and big changes indicate investor confidence in stocks, however it does not represent small or mid-size companies at all.
S&P 500
The S&P 500 is the most frequently used index by financial professionals as a representative of 鈥渢he market.鈥?It includes 500 of the most widely traded stocks and leans towards the larger companies.
It covers about 70% of the market鈥檚 total value, so in those terms it is much closer to representing the true market than the Dow.
The S&P 500 is a market capitalization or market cap weighted index, as are almost all of the major indexes.
Weighting by market cap gives more importance to larger companies, so changes in Microsoft stock will have a greater impact than almost any other stock in the index.
Even though the S&P 500 is weighted toward larger companies, it is a more accurate gauge of the broader market than the Dow is.
Even though some of the talking heads on TV may emphasize the Dow, you will get a clearer picture of the market by focusing your attention on the S&P 500.
The Nasdaq Stock Market Composite
The Nasdaq Stock Market Composite is composed of all the stocks on the Nasdaq market 鈥?more than 5,000.
Although broad in coverage, the Nasdaq is heavily weighted to technology stocks. This is because it is a market cap weighted index and stocks like Microsoft and some of the other big technology companies influence the index.
Their influence and the population of small, speculative companies in the Nasdaq make the index more volatile than either the Dow or the S&P 500.
The Nasdaq obviously is not designed to represent 鈥渢he market,鈥?however it does give you a good idea of where technology investors are going.
What is Dow Jones? The Dow Jones Industrial Average (DJIA) is an index of thirty, blue chip stocks that are traded in the United States. It is believed that by looking at the companies on the list, a person can get a general picture of how the market as a whole is performing. The Dow is perhaps the most quoted and followed index in the world, and dates back to May 26, 1896. It was then comprised of 12 stocks and opened at 40.94.
For more information, go to http://www.dowjones.com
What is Nasdaq? The NASDAQ is an electronic exchange where stocks are traded through an automated network. It stands for National Association of Securities Dealers Automated Quotations System. As a general rule of thumb, it is where most technology stocks are traded. A quick way to tell if a company is listed on the NASDAQ is to check out the ticker symbol... those made up of four letters are listed here (e.g. Microsoft = MSFT, Dell Computers = DELL, Cisco = CSCO). |
