What’s a Stock Market Index + How to Buy the Total Market?

Discover the Difference Between the Stock Market, a Stock Exchange, and a Stock Market Index. Also, Find Out if you can Buy the Total Stock Market.

Why are there Stock Markets?

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 a business to get access to the wealth and capital available in these countries to finance growth.

What is a Stock Market?

A stock market is a general term used to reference the total stock exchanges in the world or even a specific stock exchange.  A stock market is used to reference a place where individual stocks or shared are traded between buyers and sellers.

What is a Stock Exchange?

Stock Exchanges are usually companies who provide the infrastructure to allow the buying and selling (trading) of shares in listed companies.

The World Federation of Exchanges (WFE) regulates 52 Stock Exchanges across the globe promoting regulatory standards.  Below you can see the list of the major exchanges regulated and reported on.  I have sorted this list on the Domestic Market Capitalization.  This Capitalization is the value of all the shares traded on the exchange.

Facts About Stock Exchanges

  • The biggest stock exchange in the world is the New York Stock Exchange (NYSE Euronext) with a total value of over $13 Trillion Dollars
  • The 2 largest exchanges in the world are the US NASDAQ the US NYSE – the combined value of these two exchanges is equal to the value of the next 6 smaller exchanges (Tokyo, London, Hong Kong, NYSE Euronext Europe, Shanghai and the TSX Group)
  • The NYSE & NASDAQ account for roughly 40% of the value of the Global Stock Markets
  • The 52 Regulated Exchanges have a combined value of $51,7 Trillion Dollars
  • The top 10 exchanges account for over 70% of the capitalization of the global markets

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.

What is a Stock Market Index?

All of the stocks listed on 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 heavyweight 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 (ticker: JPM).  However, it does still contain the industry heavyweights such as Exxon Mobil Corp (ticker: 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 nonfinancial 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 Stock Market 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 Stock 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.

Can I Buy the Total Stock Market?

Believe it or not, YES you can buy a part of the Total Stock Market.  There are many Exchange Traded Funds that specialize in managing a portfolio which is diversified across all the worlds stock markets.  Essentially if you buy a share in one of these ETF’s you are buying a portion of the Total Stock Market.

List of Total Stock Market Funds

ETF Ticker Company Fund Name
VTSMX Vanguard Total Stock Market Index Fund
SPTM SPDR Total Stock Market ETF
SWTSX Schwab Total Stock Market Index Fund
BASMX iShares Total U.S. Stock Market Index Fund
ITOT iShare S&P Total US Stock Market ETF

What is the VTSMX?

The most popular way for investors to get exposure to the Total Stock Market is to invest in the Vanguard VTSMX – Total Stock Market Index Fund.  Established in 1992 this fund is large by capitalization and Vanguard essentially kick-started the ETF revolution.

Stock Market Index Summary

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.

For further information about the stock market read our 39 Stock Market Statistics that will Blow your Mind

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