This is the third installment of a series of blog posts about investing….the hows and whys. I originally posted this series, with a few minor changes, at Daily Money Shot as a guest blogger.
As promised today’s post is about the S&P 500, the Dow Jones Industrial Average, and the NASDAQ. It is important to know the difference between the three and also what they represent.
The S&P 500 is an index of the top 500 publicly traded companies. “The index does include a handful (15 as of May 8, 2012) of non-U.S. companies.”
There is a committee that selects which companies are allowed into the 500. The S&P 500 is “representative of the industries in the United States economy.” This is very simplistic. There are weightings of the different industries, but for our purposes we just need simplistic.
One of the things you may hear about or read about is an S&P 500 Index fund. What that means is that a mutual fund was created to attempt to mimic the returns of the S&P by having the same stocks in their portfolio. There are a lot of brokerage firms that offer an S&P index fund.
The Dow Jones Industrial Average or the Dow is quoted all the time in regards to the market. “It is an index that shows how 30 large publicly-owned companies based in the United States have traded during a standard trading session in the stock market.”
The Dow Jones Industrial Average has very little resemblance to the Industrial in its name. It was originally founded to measure the performance of heavy industry in America. Now it is the go-to index to gauge how the stock market is doing even though it only follows 30 stocks, albeit large companies in their industries.
When I want to know how the market is REALLY doing I check the S&P 500 ticker. The DJIA ticker is a good indicator of the stock market movements but 30 companies do not make a market, in my humble opinion.
The NASDAQ is also an index like the S&P and the Dow. Like both of them, the NASDAQ “is a statistical measure of a portion of the market.”
As with the S&P, you can have a mutual fund that tracks the NASDAQ.
I know this is very confusing to most people. I have found one of the best places for no-nonsense definitions is located on About.com ‘s Budget and Personal Finance page.
I inserted a lot of links this time, but I wanted to give credit to the websites for the definitions I used, plus I am not as eloquent as a writer in defining the indexes. I don’t want to give you the wrong information.
And besides, why re-invent the wheel?
I hope this brings a little more clarity to some more of those mysterious acronyms and words you hear bandied about.
Part 4 will bring some insight into Investment Style and what that means.