There are many Stock Markets in the world and they have essentially been established to allow business to get cheap financing to aid rapid expansion in exchange for a slice of the business and an opportunity to profit with the business. The largest stock markets are located in the richest countries; this enables business to get access to the wealth and capital available in these countries to finance growth.
All of the stocks listed by a given stock exchange are then categorized into various indices. This enables the relative performance of different types of stocks to be compared and contrasted.
In the U.S. there are different market indices targeting different sized companies and types of businesses.
S&P 500 – The Standard & Poors 500
This market index is a listing of the top 500 companies in the U.S.A based on market capitalization. Market Capitalization is the value of all the publicly traded shares of a company multiplied by the share price. This market index is probably the most widely followed index and is considered as a benchmark index for the U.S. The index comprises heavy weight corporations like Apple Inc. (ticker:APPL) valued at $432 billion (at the time of writing) to Advanced Micro Devices (ticker:AMD) valued at $1.9 billion. It is a capitalization weighted index. See below
DJ30 – Dow Jones Industrial Average
This market index was established in May 1896 by Charles Dow. Referred to as the Dow or the Industrials, this market index has non heavy industry components such as Microsoft (ticker:MSFT) and JP Morgan (ticket:JPM). However, it does still contain the industry heavyweights such as Exxon Mobil Corp (ticket:XON) valued at $403 billion and Alcoa (ticker:AA) valued at $9.9 billion. The DJ30 is a price weighted market index.
Other Popular Market Indices
- Dow Jones 15 Utility Component Index – This market index comprises the top utility companies in the U.S.
- Dow Jones 20 Transports – Comprising Airline, Railroad, Trucking and Postal companies.
- NASDAQ 100 – The top 100 largest capitalization non financial stocks listed on the NASDAQ Stock Exchange.
- NASDAQ Composite – All of the Securities and stocks listed on the NASDAQ Stock Exchange.
- Russell 3000 – This market index comprises the top 3000 stocks in the U.S. based on market capitalization. This covers almost 98% of the value of U.S. Traded stocks. So if you want to view the entire market this is the index to check.
- Standard & Poors 400 MidCap – Mid sized Capitalization stocks.
- Standard & Poors 600 SmallCap – Smaller capitalization stocks are listed in this market index. This could refer to start up companies and growth companies in the early stages of development.
Capitalization Weighted Index
A capitalization weighted index means the index is calculated based on the total market value of all the stocks in the index. This means that stock price changes in the largest companies with the largest market capitalization’s will have a larger effect on the movement of the index.
Price Weighted Market Index
A price weighted index is a market index that is calculated not on the overall equity or capitalization of the listed companies, but instead on the price of the stock. This means that the weighting of the index is dependent on the stock’s price, this can lead to confusion as a smaller company with a stock price of $200 will have a larger impact on the movement of the index than a larger company with a stock price of $10.
In this article we covered the different types of market index and how they are weighted. There are also various market sectors and industries. If you want to invest in a particular index, industry or segment as a whole rather than buying individual stocks then you should consider exchange traded funds as they are low cost and an effective way to diversify your portfolio.