Stock indexes measure price fluctuations among stocks. By following the appropriate stock market index, you can compare the performance of your stocks to similar types of stocks within a particular index.
The Dow Jones Industrial Average. The Dow Jones Industrial Average (DJIA) is the figure most often referred to on the news when the market's daily activity is recapped. The DJIA is a price-weighted index of 30 major companies, including McDonald's, Wal-Mart and General Electric. As a result, high-priced stocks have much more of an influence on the index than low-priced stocks.
While changes have been made to the composition of the index over the last few years to more accurately represent the United States' service-based economy, the index is still heavily weighted toward energy stocks and stocks in cyclical industries, which often mirror the pace of economic growth and the demand for commodities. Also, the index is underweighted relative to other popular averages in financial stocks and heavily underweighted in technology stocks. The Dow Jones Industrial Average is a trademark of Dow Jones & Company.
The Standard & Poor's 500. The S&P 500, like the Dow, is designed to track the performance of large companies, often called "large caps." The S&P is a market-capitalization weighted index that measures 500 stocks and is composed of a broad-based group of New York Stock Exchange-listed, American Stock Exchange-listed and over-the-counter stocks. The index is heavily weighted toward fast-growing companies and is a good reflection of the United State's service-based economy. For this reason, it's considered the benchmark for comparing the performance of large-cap growth funds and money managers.
The index is also broken down into sectors: 400 industrial, 20 transportation, 40 utility and 40 financial stocks. Because these categories are evaluated individually, the S&P 500 is one of the best indicators for determining current market trends among specific industries.
The Nasdaq National Market System Composite Index. This index measures the performance of stocks that are traded over-the-counter. The index contains many "seasoned" companies as well as stocks of newer companies, mostly in the fields of technology and financial services. The companies are generally considered more speculative investment risks.
It is important to note that this index is wrongly but widely considered a good measure of the performance of small-company ("small-cap") stocks. It is a poor measure of small-cap stock performance because of the overwhelming dominance of a handful of large-cap technology names such as Microsoft and Dell Computer.
The Russell 2000 Index. The Russell 2000 is used to measure the performance of small-company stocks. The Frank Russell Company constructs the index by first determining the 3,000 largest U.S. companies based on market capitalization. The 3,000 companies represent about 98 percent of the equity securities in the country. The largest 1,000 companies comprise the Russell 1000 index and this represents about 90 percent of the total market capitalization of the Russell 3000 index. The smaller 2,000 companies comprise the Russell 2000 index and accounts for the remaining 10 percent of the total market capitalization of the Russell 3000.
Evaluating stock indexes will help you determine whether your stocks are beating the average for similar stocks or lagging their peers.
• Patrick S. O’Connor , CRPC is the Managing Principal, Senior Financial Advisor and a Chartered Retirement Planning Counselor CRPC at Wells Fargo Advisors Financial Network off of Randall Road next to the new Hobby Lobby in Algonquin. He can be reached at 847-458-0142, emailed at p.oconnor@wfafinet.com or at www.algonquin.wfadv.com.
