This is the third post in the Investing Basics series, written by Jennifer from To My Girlfriends. I’m thrilled to have her guest posting here, particularly on this subject. It’s been quite informative!
Let’s talk about the S&P 500, the Dow Jones Industrial Average, and the NASDAQ. It is important to know the difference between the three and also what they represent.
The S&P 500 is an index of the top 500 publicly traded companies. “The index does include a handful (15 as of May 8, 2012) of non-U.S. companies.” (http://en.wikipedia.org/wiki/S%26P_500) There is a committee that selects which companies are allowed into the 500. The S&P 500 is “representative of the industries in the United States economy.” (http://en.wikipedia.org/wiki/S%26P_500) This is very simplistic. There are weightings of the different industries, but for our purposes we just need simplistic.
One of the things you may hear about or read about is an S&P 500 Index fund. What that means is that the fund is attempting to mimic the returns of the S&P by having the same stocks in their portfolio. There are a lot of brokerage firms that offer an S&P index fund.
The Dow Jones Industrial Average or the Dow is quoted all the time in regards to the market. “It is an index that shows how 30 large publicly-owned companies based in the United States have traded during a standard trading session in the stock market.[1]” (http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average)
The Dow Jones Industrial Average has very little resemblance to the Industrial in its name. It was originally founded to measure the performance of heavy industry in America. Now it is the go-to index to gauge how the stock market is doing even though it only follows 30 stocks, albeit large companies in their industries. When I want to know how the market is REALLY doing I check the S&P 500 ticker. The DJIA ticker is a good indicator of the stock market movements but 30 companies do not make a market, in my humble opinion.
The NASDAQ is also an indices like the S&P and the Dow. Like both of them, the NASDAQ “is a statistical measure of a portion of the market.” (http://www.investopedia.com/ask/answers/03/072403.asp#axzz28COYuRP2) As with the S&P, you can have a mutual fund that tracks the NASDAQ.
All of this is very confusing to most people. I have found one of the best places for no-nonsense definitions is here: http://budgeting.about.com/od/budget_definitions/a/The-S-and-p-500-Nasdaq-Dow-Jones-market-index.htm I know I am inserting a lot of links today, but that is because I am not as eloquent as a writer in defining the indexes. I don’t want to give you the wrong information. Besides, why re-invent the wheel.
I hope this brings a little more clarity to some more of those mysterious acronyms and words you hear bandied about.
Great post. Direct and to the point. I think you’re right that a lot of people don’t understand these definitions but you explained it wonderfully. Thank you!