The Dow Jones, Nasdaq Composite Index, and the S&P 500 are all stock market indices, but do you know how they differ and what they tell us as investors? Each index measures the performance of a collection of stocks, providing a unique perspective on stock market performance.
The goal is to review data that spans various companies and industries as opposed to monitoring individual stocks. Individual stocks do not always follow an index as their success or failure is often tied to internal business operations. When it comes to an index, it’s all about getting an accurate, birds-eye view of the US securities market.
Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA), also known as the Dow, was the first published index in 1896. While the index has evolved, today the index represents 30 of the largest US publicly traded companies. They’re nearly all household names including Apple, Boeing, Goldman Sachs, Procter & Gamble, McDonald’s, Microsoft, and Visa, just to name a few.
Remember this is a US index, meaning other very large companies in the world impact world markets. The Dow is an overview of 30 core stocks traded on either the New York Stock Exchange (NYSE) or the Nasdaq.
Nasdaq
Like the NYSE, the Nasdaq is a stock exchange. But we’re focused on the index that tracks the performance of the Nasdaq. The Nasdaq Composite Index measures the performance of all 3,000+ companies traded on the Nasdaq Stock Market. This Nasdaq Composite Index is heavily weighted by the technology industry.
“The Nasdaq Composite is a market cap-weighted index, simply representing the value of all its listed stocks. The set of eligible securities includes common stocks, ordinary shares, and common equivalents such as ADRs. However, convertible debentures, warrants, Nasdaq-listed closed-end funds, exchange traded funds (ETFs), preferred stocks, and other derivative securities are excluded.” (Nasdaq) Simply put, the Nasdaq Composite is an index representing all stocks traded on the Nasdaq Stock Exchange along with American Depository Receipts (ADRs) and Real Estate Investment Trusts (REITs).
As an investor, you may have also heard of the Nasdaq 100; which is not the same as the Nasdaq Composite Index. “The companies in the Nasdaq-100® include 100-plus of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.”
If you continue researching, you’ll notice a few stocks are represented on both the Dow and Nasdaq indices, like Apple and Amazon, both big players in the tech industry that are traded on the Nasdaq. While the Nasdaq Composite Index is limited to the Nasdaq stock exchange, the Dow is not, leading to some overlap. The Dow primarily includes stocks traded on the NYSE but also includes a few traded on the Nasdaq.
S&P 500
The Standard & Poor’s 500 is the third primary index tracking the performance of 500 leading U.S. publicly traded companies. While the exact formulas are intricate, it’s interesting to note that companies with larger market capitalization are more heavily weighted in this index.
While each index serves an important purpose in tracking the stock market, the S&P 500 is often regarded as a notch above the rest. This is because of its acceptance worldwide as an economic indicator and the great depth it provides by representing 500 companies without regard to industry.
Using a Stock Market Index
Now that we have a greater understanding of what each index represents, why exactly do they matter? Indexes are used as benchmarks, they tell a story of how the stock market is performing at a specific point in time. While you can’t invest directly in an index, many investment funds are often created to mirror a specific index.
History tells us that the movement of the stock market, over time, is somewhat predictable. Movement in the stock market is heavily correlated with overall supply and demand, economic reports, and foreign affairs like wars and oil markets. We've seen this firsthand as interest rates have risen, causing a dip in the stock market when the news is released. The higher interest rates make borrowing money harder, leading to less demand for goods and services, ultimately slowing down the economy.
Picking stocks and investments is not an easy feat and there is no way to be certain of how an individual stock, index, or any security market investment will perform. But knowledgeable CERTIFIED FINANCIAL PLANNER™ (CFP®) professionals pair data provided from indices, the history of the stock market, and their financial education to build financial portfolios.
It’s important to remember that regardless of what the market is telling us, each person's financial plan is unique. We all have our own short-term and long-term goals, and the retirement of your dreams differs from your neighbors. While stock market indexes are great benchmark indicators of how the market is performing, always keep your goals at the forefront when investing and selecting a financial advisor.
About Integrated Wealth Management
Integrated Wealth Management is owned by Burt Hutchinson, CPA, CFP®. We’re a CPA-led organization, meaning we’re here to handle your complex tax scenarios and provide cost-saving insight related to your financial plan.
We’re here to guide you through the 3 stages of retirement:
Uncertainty Stage: When you are within 10 years of retirement and have questions about how to make it work
Stability Stage: When you have reached the financial milestone to retire comfortably and confidently
Reflection Stage: When you are looking to leave a legacy
We are also here to provide experienced, empathetic support during times of loss, such as the death of a life partner. You need confidence and a sense of security to enjoy retirement. As fiduciaries with a fee-only structure, we never receive commissions. Free of ulterior motives, you can be sure we’re focused on your goals.
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Disclosure Statement:
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax, or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website,Past performance is not a guarantee of future results.