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Stock market indexes
All markets are correlated, so it is highly important for traders to understand what indexes of other markets mean.
In this article, we will look at three the most important American indexes of the stock market. They are the Dow Jones Industrial Average, Standard & Poor's 500 Index - S&P 500, and Nasdaq Composite Index. Let’s look at descriptions of them.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 North American important stocks from different industries that traded on the New York Stock Exchange and the NASDAQ.
The index was invented by Charles Dow in 1896. When it was just launched, it included 12 stocks, that were almost purely industrial in nature. Nowadays, the index covers only companies with significant growth and investing capacity. When a company experiences financial difficulties, it is excluded. So the stock list is not constant, it can be new additions and deletions based on certain non-quantitative criteria.
At the same time, the index excludes transportation and utilities, they are covered by the Dow Jones Transportation Average (DJTA) and Dow Jones Utilities Average (DJUA).
The index uses a price weighting methodology that gives more expensive stocks a higher weight.
The DJIA is calculated by summing the component stock prices and dividing them by a divisor. The mean of the formula constantly changes. The aim of the Dow divisor is to split out the consequences of stock splits and dividends and keep the index from getting perverted. The Dow Jones index shows the average value of stocks in those shares of capital that were selected for calculation at the time when the composition of the indicator was approved.
Standard & Poor's 500 Index - S&P 500 is an index of 505 stocks that are issued by 500 large companies. The main advantage of the index is that it covers all areas of the US industries.
S&P 500 is a leading index of US equities. S&P Index Committee considers different factors of companies such as market size, liquidity, and industry grouping before accepting them. In contrast to DJIA, the index gives a higher weighting to larger companies, not more expensive. The market capitalization of one company should be at least nearly $6 billion.
It is calculated by taking the sum of the market capitalization of all 500 stocks and then dividing it with an index indicator. The indicator is developed by Standard & Poor's. However, there is an opinion that the number is 8.9 billion. The divisor is used to remove non-economic factors that can affect the index.
Nasdaq Composite Index is the index of nearly 3000 common equities that are listed on the Nasdaq stock exchange.
The index includes such types of securities as American depositary receipts, common stocks, real estate investment trusts and tracking stocks, as well as limited partnership interests.
The list of companies is not limited by those who have only US headquarters.
The index is calculated by multiplying the total value of the share by each security’s last price. Then the amount is divided by an index divisor. It helps to achieve the appropriate figure for a report.
To sum up, we can say that indexes differ with the number of stocks, industries of companies and ways of measurement. They are used in different situations when different numbers are needed.
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