Most popular share market indexes

In this article we will discuss about most popular share market indexes such as Dow Jones Industrial Average (DJIA), S & P 500 and NASDAQ. Our discussion will include overall analysis of this popular market indexes and their effect on financial market.

Dow Jones Industrial Average (DJIA)

DJIA is the second oldest stock market index after Dow Jones Transportation Average. This index is found in way back 1885. The index consists of average of the price of 30 large public companies in United States. The value of the Dow is not the actual average of the prices of its component stocks, rather the sum of the component prices divided by a divisor (D), which changes whenever one of the component stocks has a stock split or stock dividend, so as to generate a consistent value for the index. So, the formula for calculating DJIA is-

Where, p is the prices of the component stocks and d is the Dow Divisor.

What kinds of stocks are traded over the DJIA?

DJIA consists of stocks from various types of industries. Actually, DJIA covers all major areas of US economy except transportation sector and utility sector. This is because for this sector there are dedicated index available. It consists of 30 most familiar blue chip companies of United States.

S & P 500

This is a stock market index based o market capitalization of 500 large companies having common stock listed in New York Stock Exchange. It differs from other U.S. stock market indices such as DJIA and NASDAQ due to its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices and many investors consider it the best representation of the U.S. stock market.

The formula to calculate the S&P 500 Index value is:

Where, P is the price of each stock in the index and Q is the number of shares publicly available for each stock.

What kinds of stocks are traded over the S&P 500?

The S&P 500 covers almost all major areas of the U.S. economy. It does not take 500 largest companies; rather it takes 500 most widely held companies - chosen with respect to market size, liquidity and industrial sector.  These components are chosen by the S&P Index Committee. Anywhere from 25-50 changes are made every year because of the change in status of the company due to mergers or fallouts. International companies have been included in the past, but only U.S. companies will be added in the future.

NASDAQ

NASDAQ is the second largest stock market after NYSE. NASDAQ has two popular indexes named NASDAQ-100 and NASDAQ Bank Index. As named suggests NASDAQ-100 consists of the 100 most wider stocks listed in NASDAQ. This is a weighted price index.

What kinds of stocks are traded over the NASDAQ?

The National Association of Securities Dealers Automated Quotation system, or NASDAQ, was established in 1971 as a way to increase trading for over-the-counter stocks. These are stocks that are not able to meet the requirements to be listed on larger exchanges such as NYSE. So, it is quite clear that NASDAQ consists of small and medium type of stocks.

In order to answer question of an investor as why one index go up and other does not or fall out we will say this is simply because components of that index. If stock price of the 30 companies in DJIA does not move significantly then DJIA will not change much but at the same time if stocks of S & P 500 could be change. Another reason for this could be the way of calculation of that particular index.

How are these three financial markets related?

As we discussed above, this indexes indicates market capitalization of the companies consists of this indexes. So, it reflects market overall scenario for this stocks and market at large. It is a tool widely used by investors and financial analyzers to describe the market, and to compare the return on specific investments.