Indices act as key indicators of market performance. They represent the broader US economy and help investors to track different sectors. Now, let’s study some of the most important indices of the US market:
S&P 500
The S&P 500 tracks the performance of 500 large companies in the US. It is one of the most widely used benchmarks for the market. This index is based on market capitalisation, which means companies with higher market values have a greater impact on the index.
The index represents around 80% of the US stock market and gives a broad view of its overall performance. Some major companies in the S&P 500 include Apple, Microsoft, Amazon, and Alphabet (Google).
The Dow Jones Industrial Average (DJIA)
DJIA is one of the oldest and most widely recognised stock indices in the world. It was created in 1896 and originally included 12 companies. This count expanded to 30 in 1928. Even now, the DJIA tracks 30 large blue-chip US companies. Moreover, DJIA is a price-weighted index. This implies companies with higher stock prices have a larger impact on the index's value compared to companies with lower stock prices.
Next, the DJIA represents about 25% of the US stock market and is seen as an excellent indicator of the performance of blue-chip companies. Some prominent names included in this index are Apple, Microsoft, Coca-Cola, and McDonald’s.
Moreover, the DJIA calculation has even evolved over time. Now, it takes factors like stock splits and spin-offs into account. However, its core purpose still remains to reflect the economic strength of top US companies.
The Nasdaq Composite
This is another major US stock market index that tracks around 3,000 companies listed on the Nasdaq exchange. Just like the S&P 500, it is also a market capitalisation-weighted index. The index focuses heavily on tech companies, besides also includes stocks from sectors like finance and transportation. Some non-US companies are part of the index as well.
This index is considered a key indicator of the tech sector's performance and investor sentiment. It is worth mentioning that to be part of the Nasdaq Composite index, companies must be listed on the Nasdaq stock exchange. Additionally, they must meet specific criteria, such as being common stock, a Real Estate Investment Trust (REIT), or other approved types of securities.
The Wilshire 5000 Total Market Index (TMWX)
This index includes all publicly listed companies in the US with available pricing data. Created in 1974, this index tracks the overall movement of the “entire US stock market”. To get included in this index, companies must:
- Have their headquarters in the US
- Be actively traded on US exchanges
- Have publicly available pricing information.
The TMWX is considered the best single measure of the US stock market’s overall performance.
