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What’s a stock index?

DJIA, S&P 500, NASDAQ, and EAFE. Does this feel like reading a menu in a foreign country? For most, it definitely shouldn’t mean much to you. Sure the pretty newscaster says things like “the S&P 500 is up 25 points today”, but you have no clue what S&P 500 stands for.

These acronyms mentioned above are stock indexes. An index tracks the performance of a particular group of stocks that let us all know if the stock market is going up or down. Everyone wants to know if they are making money or losing money, so indexes get lots of attention. Here is a list of the major indexes and what they represent:

DJIA – The full name is Dow Jones Industrial Average. This index tracks the stock prices of 30 very large U.S. companies like Disney, Intel, Coca Cola and Johnson & Johnson. It was created in 1896 to track the performance of the stock market. Since it was the first index and has the longest history, the Dow is the index most talked about in the news. However, the 30 companies in the Dow only represent about 25 percent of the stock market universe.

S&P 500 – S&P is short for Standard & Poor’s, which is a market research firm. Standard & Poor’s created many indexes, but the S&P 500 is the most popular. This index tracks the performance of the 500 largest U.S. companies that represents about 80 percent of the stock market. I like this index better than the Dow because it includes 500 companies instead of the Dow’s 30 companies. Unfortunately, the news outlets don’t agree with me.

NASDAQ – This acronym comes from the National Association of Securities Dealers Automated Quotations. That’s a great trivia question that most people won’t know the answer. NASDAQ is a stock exchange just like the New York Stock Exchange (NYSE) where trades are made. Pretty much any trade you make when buying or selling a stock is executed through one of these two exchanges. A stock exchange is sort of like a swap meet bringing together buyers and sellers. The NASDAQ is unique because most of the companies traded on this exchange are tech companies like Google, Facebook and Apple. So the NASDAQ index ends up telling us how the tech industry is doing rather than the entire stock market.

EAFE – This one stands for Europe, Australasia and Far East. This index was created by Morgan Stanley Capital International to track the performance of the international stock market. It tracks the performance of more than 1,000 companies in 21 countries.

These are just four indexes out of hundreds of indexes that track different market segments. There is no need to know all the different indexes. The important thing to remember is that an index tracks the performance of a specific group of stocks.

Steve Doster is a Certified Financial Planner™ professional providing commission-free financial advice for do-it-yourself investors. You can reach Steve at Doster Financial Planning by phone 619-688-1192 or email steve@dosterfinancialplanning.com. You can also follow Steve on Facebook, Linked In, Twitter, or blog to get more personal finance advice and tips.

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Posted by on Apr 10, 2014. Filed under Bottom Highlights, The Money Shot. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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