
Main Stock Market Indexes
Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA) is the oldest and most
widely quoted measure of the stock market. The DJIA is composed
of the stock prices of 30 large blue-chip companies. The closing
stock prices of each of the 30 stocks are added and then divided
by an adjusted divisor. This divisor is a very small number (e.g.,
0.123051408 as of May 11, 2007), which makes the DJIA a greater
number than the average of the stock prices. When the DJIA was
first introduced, it was calculated using a simple average of the
number of stocks in the calculation. However, because of stock
splits and the addition of new stocks to replace stocks that were
dropped, an adjusted divisor was used to keep the average from
changing for stock splits and the addition of new stocks. This
adjusted divisor explains why the DJIA can be a large number such
as 10,800 with the addition of only 30 share prices of the companies
in the average.
Given the small number of companies in the DJIA, care has
been taken over the years to make sure that these companies are
broadly representative of the market. Thus, in 1997, four companies
[Bethlehem Steel, Texaco, Westinghouse (now Viacom), and Woolworths
(now Venator Group)] were dropped and were replaced by
Hewlett-Packard, Johnson & Johnson, Citigroup, and Wal-Mart.
Later changes included the addition of Microsoft Corporation and
Intel Corporation.
Much criticism surrounds the DJIA. First, the stocks are not
equally weighted; consequently, an increase in a higher-priced stock
has a greater impact on the DJIA than an increase in a lower-priced
stock. Second, with a sample of only 30 large blue-chip stocks, the
DJIA is hardly a representative measure of the market.
Yet the DJIA still can be of use to investors. First, by looking at
a chart of the DJIA over a period of time, investors can see the ups
and downs of the market, which can help you to decide when to
buy and sell stocks. Second, the DJIA can be used as a yardstick for
comparing how your blue-chip stocks and blue-chip mutual funds
have performed in comparison with the DJIA for the same period
of time. However, because the DJIA is composed of only 30 stocks,
you also should look at more broad-based measures of the market.
Table 6–1 presents a comparison of the DJIA, the S&P 500 Index,
and the Dogs of the Dow for the past 16 years.
The Dogs of the Dow is an offshoot of the DJIA. It involves a
strategy of investing in the 10 highest dividend-yielding stocks in
the DJIA at the beginning of the year and then replacing the stocks
with the 10 highest-yielding stocks the next year.
Other Dow Jones averages are the Dow Jones Transportation
Average (DJTA), which is composed of the stocks of 20 major transportation
companies, the Dow Jones Utility Average (DJUA), which
consists of 15 major utility stocks, and the Dow Jones Composite
Average, which combines the three Dow Jones averages and all
their stocks.
Standard & Poor’s 500 Index
Standard & Poor’s 500 Index (S&P 500) consists of 500 stocks listed
on the New York Stock Exchange and the Nasdaq. The 500 companies
included in the S&P 500 Index also can be broken down into
the following indexes:
* S&P Industrial Index, which consists of 400 industrial stocks
* S&P Transportation Index, which consists of 20 transportation
companies
* S&P Utilities Index, which consists of 40 utilities companies
* S&P Financial Index, which consists of 40 financial companies
Table 6-1
Performance of the Market Indexes

The most often cited of the S&P indexes is the S&P 500 Index.
The S&P 500 is a market-value-weighted index that is computed
by calculating the total market capitalization (value) of the 500
companies in the index, dividing that by the total market capitalization
of the 500 companies in the base year, and then multiplying
the number by 10. The percentage increase or decrease in the
total market value from one day to the next represents the change
in the index.
With 500 stocks, the S&P 500 Index is more representative of
the market than the DJIA with only 30 stocks. The S&P 500 Index
occasionally adds and drops stocks to maintain a broad representation
of the economy. The S&P 500 Index is an important measure of
the performance of larger stocks in the market, which is further confirmed
by the growing popularity of S&P 500–indexed mutual funds
(mutual funds that hold portfolios of stocks designed to match the
performance of the S&P 500 Index). These mutual funds outperformed
most of the actively managed funds in 1998 primarily because
many actively managed mutual funds invested in value stocks
and small-capitalization stocks, which all underperformed the 50
large growth stocks in the S&P 500 Index. From 1995 to 1999, both
the DJIA and S&P 500 Index more than doubled, only to decrease by
about half in the bear market of 2000–2002. The broader market of
small-capitalization stocks lagged and did not participate in the
four-year rally from 1995 to 1999. Small-cap stocks outperformed
large-cap stocks in the five-year period from July 2001 to July 2006.
New York Stock Exchange Composite Index
The New York Stock Exchange Composite Index is a more broad-based
measure than the S&P 500 Index because it includes all the stocks
traded on the New York Stock Exchange (NYSE). It is a marketvalue-
weighted index and, like the S&P 500, relates to a base period,
December 31, 1965. On that date, the NYSE Composite Index
was 50. In addition to the NYSE Composite Index, the NYSE also
has indexes for industrials, utilities, transportation, and financial
stocks.
Nasdaq Composite Index
The Nasdaq Composite Index is a measure of all the stocks traded on the
National Association of Securities Dealers Automated Quotations
(Nasdaq) System. The Nasdaq Index is more volatile than the DJIA
and the S&P 500 because companies traded on the over-the-counter
(OTC) market are smaller and more speculative than the larger companies
that trade on the NYSE. Thus an increase in the Nasdaq
Composite Index can be interpreted as investor enthusiasm for small
stocks.
Other Indexes
The American Stock Exchange (AMEX) Index is value-weighted and
includes all stocks listed on that exchange.
The Wilshire 5000 is the broadest index and includes all companies
listed on the NYSE and the AMEX, as well as many of the
larger stocks traded on the OTC market.
The Value Line Composite Index differs from the other indexes
in that it is calculated with a geometric averaging method using
1,700 stocks listed on the NYSE, AMEX, and OTC markets.
The Russell 3000 Index is a broad-market index that offers investors
access to 98 percent of the U.S. market. The largest 1,000
stocks in the Russell 3000 Index make up the Russell 1000 Index, and
the smallest 2,000 stocks in the Russell 3000 make up the Russell
2000 Index (a measure of the performance of small-cap stocks).
The EAFE Index is the benchmark for foreign stocks and foreign
stock mutual funds. The EAFE is the Morgan Stanley Capital
International Europe, Australasia, Far East Index, which includes
1,026 stocks from 20 countries.
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All about Stocks Encyclopedia about Stocks. That you should know about Stocks before starting
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