The Dow Jones Industrial Average is published by the Wall Street Journal, whose editors select the stocks to include in the average. The first industrial average – published in 1896 – tracked 12 stocks. The list grew to its current size of 30 stocks in 1928. They first figured out the Dow’s value by adding up the stock prices and dividing that total by the number of stocks in the average. This calculation changed as stocks were added to and taken out of the average, companies merged and stocks split.
Some investors believe that the Dow no longer paints an accurate picture of the overall stock market. One reason is that the equation used to find the Dow’s value gives more importance to high-priced stocks than to low-priced stocks. A big change in just one high-priced stock might cause the average to give a false reading of the market. The Dow might also be too small to represent the entire market because it follows only 30 of roughly 3,000 stocks traded on the NYSE. And since it doesn’t track many consumer goods or technology stocks, it may be missing some of the industries that have become more important to the overall market.
The S&P 500
A big difference between the Dow and the S&P 500 is how their values are calculated. While the Dow only looks at stock prices, the S&P 500 looks at the total market value of each stock in the index. A stock’s total market value is found by multiplying its share price by the number of outstanding shares. To find the S&P 500’s current value, a computer figures out the total market value of all 500 stocks in the index, adds them together and divides that sum by a number called the "index divisor."
A lot of investors prefer to use the S&P 500 as a market indicator because it looks at total market value and includes more stocks from different industries than the Dow. Many mutual fund portfolio managers compare their fund’s performance with this index.
This computerized trading system was launched in 1971 and has become very popular as the market for smaller companies. Stocks traded over-the-counter, rather than on a traditional stock exchange, are reported here. The Nasdaq Stock Market now accounts for over half of the volume of all stocks traded every day, and the Nasdaq Composite currently tracks the prices of more than 3,000 stocks.
As with the S&P 500, the market values of the companies within the index are used to calculate the value of the Nasdaq Composite. But because it contains so many smaller companies, this index offers a look at a different section of the market than the Dow or the S&P 500. Investors use the composite to get an idea of what’s going on with young, and possibly fast-growing, companies.
