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3rd April 2019 | Mateusz Groszek | Portfolio Fundamental Analyst

Understanding the indexes - S&P, NASDAQ, DJIA

Today we are moving to the country, where the most important and most popular indexes are listed. Do you know where this is? Most of you know the answer, the country with the most popular stock indexes is United States.

The American indexes are the most popular in the world because they have a long history of quotations, high liquidity, high market cap and they are transparent. Today we will cover the three main indexes: S&P 500, Nasdaq and DJIA. Each of them are listed in the USA, but differ from each other.

S&P 500 index

The S&P 500 Index or the Standard & Poor's 500 Index is the most popular from the three indexes. This index was created in 1957 and it was the first U.S. market-cap weighted stock market index in the American stock exchange history.

Following the name, it includes 500 leading companies and captures approximately 80% of available market capitalization. It is a float-adjusted market-capitalization-weighted index. It is calculated by the sum of the market capitalization of each company and divides it by a divisor which is set initially to make the index a round number. The float-adjusted means that the index counts those shares that are available to investors and excludes closely held shares or shares held by governments or other companies. The S&P 500 moved to float adjustment from pure market-capitalization in 2004.

In simpler words, the bigger company will have a bigger weight in the index. Let’s consider Apple. In 2019 Apple is the biggest American company and its weight in the index is 4.21%.  The top 10 company give to index approximately 20% weights. 

The S&P 500 index is probably the most diversified index in the United States because it could give us exposure to 11 sectors: communication services, consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, real estate, and utilities. 

Nasdaq

The Nasdaq Composite is another, very popular index in the investor community. Similar to the S&P 500 index, it is a float-adjusted market capitalization-weighted index. The main difference is the number of the companies included in the index. It includes over 3300 companies which are listed on the Nasdaq exchange. 

The second difference between the Nasdaq Composite index and the S&P 500 is the market capitalization of the company. As we mentioned earlier, the S&P 500 index includes only the biggest 500 companies, the Nasdaq Composite includes the biggest and also the smallest ones. 

In the Nasdaq Index family, we could also find a Nasdaq-100 Index. This is a subset index of the NASDAQ Composite's, accounts for over 90% of the NASDAQ Composite's movement. Investors prefer the second index because it is simpler to replicate.

DJIA

Dow Jones Industrial Average or simply DJIA, is another, very popular index in the Traders and Investors community. The DJIA is an index that tracks 30 large, publicly-owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. The DJIA is named after Charles Dow, who created it in 1896, and his business partner, Edward Jones. 

This is the oldest index in the United State it’s the price weight index, not market-capitalization as S&P 500. The difference between price weight and market capitalization indexes is very important, and you should be familiar with it. The price weight means that the stocks with higher share price are given greater weight in the index. So, a higher percentage move in a higher priced component will have more impact on the final calculated value.

When the index was launched in 1896, it had only 12 companies. Now it includes 30 companies. It is less popular than the S&P 500 because, as we mentioned previously, it is a price-weight index and for now, the market-capitalization index is more acceptable. 

In the below table you will find the summary of those three indexes.

Indexes summary

Three columns

Short name

Calculation

Number of companies

S&P 500

Float-adjusted market-capitalization

500

Nasdaq Composite

Float-adjusted market-capitalization

over 3000

Dow Jones Industrial Average

Price-weight

30

Golden Sand Bank ("Bank") exercised due diligence to ensure that the information contained in this publication was not incorrect or untrue as at the date of publication.

All Investment products are at risk, as their value can go down as well as up. The tax treatment of your investment will depend on your individual circumstances and may change in the future. If you are unsure about whether investing is right for you, please seek financial advice. This publication is not an investment recommendation or investment advice in connection with any services provided by the Bank to the Client.

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