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The S&P 500, NASDAQ, Dow Jones - What is This Stuff?

What Is a Market Index? What Does It Represent?

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There’s the S&P 500, the NASDAQ, the Dow Jones. You hear these terms thrown around on the news, and you know that these words are vaguely investing-related. But you’re not sure what any of these terms really mean. What's what?

Here’s a primer on all the investing terminology.

Market Index – The S&P 500, NASDAQ, Dow Jones, Russell and Wilshire are all examples of a “market index.” An index provides a summary of the overall market by tracking some of the top stocks within that market. An tries to provide a representative snapshot that shows the direction that the overall market is headed.

Indexes don’t necessarily track every single stock. Some indexes try to represent small, medium and large companies, while other indexes represent only the largest companies. Some indexes tend to track companies within a certain sector, like technology, while other indices are more broad.

Fun trivia: journalist Charles Dow created the first index more than 100 years ago. In 1896, Dow averaged the stock prices of the top 12 publicly-traded companies. (He added their stock prices together and divided the total by the number of stocks.) By doing this, he found that he could trace the movement of the overall market, including the general (average) movement of stocks that weren’t included in the financial calculation.

So what are the most popular market indexes?

The S&P 500 – This index tracks 500 large U.S. companies across a wide span of industries and sectors. The stocks in the S&P 500 represent roughly 70 percent of all the stocks that are publicly traded. “S&P” stands for “Standards and Poor’s,” the name of a market research firm.

Companies CAN be listed in more than one index. Some of the largest companies within the S&P 500 are also in the Dow Jones Industrial Average.

The Dow Jones Industrial Average – Named after Charles Dow, this index tracks the 30 largest U.S. companies. This means it represents “large-cap” companies, which is the industry term for “very big companies” like Johnson & Johnson, McDonalds and Coca-Cola. Although the companies within the Dow Jones represent only about 25 percent of all stocks, the DJIA is widely accepted as the leading indicator of market health.

The Wilshire 5000 – This index represents up to 5,000 companies of all shapes and sizes, from gigantic corporations to the smallest of small companies. (In industry-terminology, these are known as “large cap,” “mid-cap” and “small-cap.”) The Wilshire 5000 is often called the “total market index.” Strangely, despite how representative this index is, it isn’t nearly as popular or as followed as the DJIA and S&P 500.

The Russell 2000 – The Dow Jones focuses on large companies, but the Russell 2000 does the opposite: it tracks only the smallest companies. This index follows 2,000 of the smallest players in the stock market.

If you think that 2,000 companies is too small of a sample size, and you’re searching for a larger, more representative snapshot of how small-cap companies are faring, you can also check out its sister index, the Russell 3000.

The NASDAQ – I saved this one for last because it can get a little confusing. “Nasdaq” refers to both an index and a trading exchange. Let me back up a little and give you some background:

There’s a marketplace where people go to buy stocks. This marketplace is called an “exchange.” The most famous one is the New York Stock Exchange. There’s also a famous one called the Nasdaq Exchange.

Stocks that are traded on the Nasdaq Exchange tend to be tech companies, like Apple and Google. Of course, companies on the Nasdaq don’t have to be as huge as those two icons. Smaller companies like Angie’s List (the website that offers peer-to-peer reviews of home-repair contractors) and 1-800-Flowers (the website that delivers flowers) are also listed on the Nasdaq exchange.

The Nasdaq also trades some banking companies, airline companies like Spirit Airlines, and even a few non-tech businesses like Starbucks and shoe company Steve Madden. In other words, there’s no cast-in-stone law that says only high-tech companies are traded on the Nasdaq Exchange. The Nasdaq just generally tends to hold an abundance of tech companies.

The Nasdaq market index, which is known as the “Nasdaq Composite,” tracks the roughly 3,000 companies that are traded on the Nasdaq exchange. This is unusual, because no other exchange has its own popular index. The nightly news doesn’t read stats from the “New York Stock Exchange Composite.”

The Nasdaq Composite has grown popular because its commonly accepted as a shorthand indicator of how tech-sector and innovative companies – both big and small – are faring.

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