Indexes: taking the market's temperature
What people actually mean when they say 'the market is up 1% today'.
A basket that stands for the market
There are thousands of stocks, so people track indexes: lists of stocks combined into one number that shows how the group is doing.
The S&P 500 follows about 500 large US companies, picked by a committee. It is weighted by size, so a giant company moves it much more than a smaller one. Many people treat it as shorthand for 'the US stock market'.
The Nasdaq Composite includes the thousands of stocks listed on the Nasdaq exchange and leans heavily toward technology. The Dow Jones Industrial Average (the Dow) tracks just 30 big companies and is weighted by share price, an older method, so a stock with a higher price moves it more regardless of company size.
What 'up 1%' means
When the news says 'the S&P 500 rose 1% today', it means the index closed 1% higher than its previous close. Some stocks inside it fell; on balance, the group rose.
Index points can mislead. A 400-point move in the Dow sounds dramatic, but the percentage is what matters. The bigger the index number, the more points a 1% move is.
Other countries
Most markets have a headline index: the FTSE 100 in the UK, the Nikkei 225 in Japan, the Nifty 50 in India. Global indexes combine many countries.
Suppose the Dow is at 40,000 and rises 400 points. That is 400 / 40,000 = 1%.
If the S&P 500 is at 5,000 and rises 50 points, that is also 1%. Same move, very different-sounding point numbers. (These index levels are illustrative.)
Key terms
- Index
- A combined measure of a group of stocks that shows how that group is performing.
- S&P 500
- An index of about 500 large US companies, weighted by company size.
- Dow Jones Industrial Average
- An index of 30 large US companies, weighted by share price.
- Nasdaq Composite
- An index of the stocks listed on the Nasdaq exchange, heavy in technology.
An index is the market's thermometer, and the percentage change matters more than the points.