What is a stock index? The Dow Jones, S&P 500, and NASDAQ are often referenced when discussing the U.S. stock market, but some investors may be surprised to learn the histories and differences between these three stock index giants.
A stock index is a way for investors and financial managers to describe the stock market using a portfolio of stocks that represent a portion of the overall market. As a result, stock indexes are useful as a simplified way to track the performance of some part, or all, of a stock market without having to measure each stock individually.
For example, some stock indexes can be global indexes like the S&P Global 100, national indexes like the S&P 500, or special indexes like the Morgan Stanley Biotech Index, which includes 36 American biotechnology firms.
However, the three most famous, by far, are the Dow Jones, the S&P 500, and NASDAQ.
Here is some background on the 3 most famous U.S. stock indexes:
The Dow Jones Industrial Average (DJIA): The Original Stock Index
Created in May of 1896 by Charles Dow, The Dow Jones Industrial Average is the world’s first index. It originally contained twelve industrial stocks including General Electric (GE), the American Sugar Company, and the American Tobacco Company. Today it is one of the most widely recognized stock indexes. It now contains 30 price-weighted stocks. General Electric (GE) is the only original stock to remain on the Dow Jones Industrial Average since the beginning.
The S&P 500 (SPY): Measuring Stick of the U.S. Economy
Created in 1954, the Standard & Poor’s 500ーmore commonly known as the S&P 500ーis a stock index made up of about 500 large companies on either the New York Stock Exchange (NYSE) or NASDAQ. It is weighted so that the more valuable companies comprise of more of the index. One of the most popular indexes, the S&P 500 is often used as a representation of the U.S. stock market and U.S. economy as whole. It is also used as an investing benchmark for investors and money managers.
The Nasdaq Composite Index (NASDAQ): A Forward-Looking Index
The Nasdaq Composite Index is made up of the 3,000+ companies that trade on the Nasdaq Stock Market. Most are technology or Internet-related, but it also contains some financial, biotech, industrial companies, and others. Because so many companies are focused in technology, the Nasdaq Index is often considered to have high growth potential. On the other hand, this can also make it more volatile if something happens to the tech industry.