Stock markets reflect the sentiments of the investors about the economy’s progress. Data from a variety of companies across industries is being collected by an index. The data helps the investors to compare the current price level with the previous prices to compute market performance.
Smaller subset of the market is the focus of some indices. In an instance, the Nasdaq index tracks the technology sector. To know how technology companies are performing, it is best to look at the Nasdaq stock index.
Indices also differ in size. Some track just a few stocks while the others are looking for a thousand stocks. Different investors are focused in different sectors that’s why each index has a unique purpose.
Major Stock Indexes
- Dow Jones – tracks 30 of the largest and most important U.S. companies and the price-weighted list does not change regularly
- Nasdaq- focused on technology and includes approximately 3000 companies that are incorporated in Nasdaq stock exchange
- S&P 500- tracks the general stock market’s performance in which contains 500 companies weighted by market cap covering different sectors
Lesser-Known Stock Indices
There are thousands of lesser-known indices. These indices present the performance of stocks in a certain country or do business in a specific sector of the economy. Some indices sort large, mid-sized, and small companies into different categories. Value, growth, and dividend investing are investing strategies that others use to choose component stocks. There is an index for any type of stock that an investor might be interested in. An increase in index mutual funds and ETFs proceeded to the growth of indices to aid fund managers use passive investing strategies. This minimized costs and allows the investors to adjust their portfolio exposure depending on their preference.
ü Nasdaq 100 – an index of Nasdaq-listed stocks and a narrower index focused on the largest 100 (approximately top 3%) of stocks listed on the exchange. Financial companies are not included. A good way to track the performance of large-cap stocks emphasizing on technology.
ü Russell 2000- widely noted as the best benchmark for the performance of smaller U.S. companies. It consists of 2000 small-cap companies. Small-cap stocks tend to be more volatile than large-cap stocks. Over a shorter period, small caps can perform quite differently than large-cap. They also tend to outperform large stocks in the long run.
ü Russell 3000- a total stock market index. It is a combination of Russell 2000 and the Russell 1000 in which consist of the largest 1000 stocks in the market. It gives exposure to the whole U.S. stock market, not only limited to largest companies and the relatively volatile small-cap segment.
Indices based on Types of Stock
ü S&P 500 Value Index- includes the stocks in the S&P 500 that are regarded to have “value characteristics”. These are stocks that trade for almost low multiples of their book values and earnings, slower-growing and tend to be more mature companies. These are some of the largest stocks included in this index:
o JPMorgan Chase (NYSE:JPM)
o Berkshire Hathaway (NYSE:BRK.A)
o AT&T (NYSE:T)
o ExxonMobil (BYSE:XOM)
ü S&P 500 Growth Index- includes the stocks that are regarded to have “growth characteristics.” There are no certain cut-offs to determine growth stocks, but these are companies who have generally but not always with above-average sales growth and trade for nearly high price-to-earnings ratios. These are some of the largest stocks included in this index:
o Apple (NASDAQ:AAPL)
o Amazon (NASDAQ:AMZN)
o Facebook (NASDAQ:FB)
o Visa (NYSE:V)
Indices based on Market Capitalization
S&P 500 is a part of a total-market index known as S&P 1500. S&P 500 is a large-cap section, but the other segments are:
ü S&P MidCap 400- tracks the middle of the market. Mid-cap stocks are frequently seen as a good deal between high long-term return potential and lower volatility.
ü S&P SmallCap 600- tracks 600 small-cap companies. In comparison, Russell 2000 is a much more widely used index for small-cap stocks.