Questions You Were Afraid to Ask – Stock Market Indexes

By Riley Financial Strategies Group

Remember being told ‘the only bad question is the one you don’t ask’ as a kid? Turns out the same principle applies to adulthood – especially when it comes to questions about the financial world. Whenever we get a question about the markets, taxes, or personal finance, we have never once thought ‘that’s a stupid question.’

Nevertheless, at some point, everybody has a financial question that they keep to themselves. That’s why Riley Financial Strategies Group is excited to welcome you to the inaugural entry in our ‘Questions You Were Afraid To Ask’ blog series!

Today’s topic: “What Exactly is the Difference Between the Dow, S&P 500, and NASDAQ?

When people hear ‘The Dow closed at 34,000 today’ or ‘The S&P closed at 4,433.’ or ‘The NASDAQ rose 1.5% as tech shares.’ on the news, they know it refers to the stock market, but might not know what exactly it means. Why is the Dow always so much higher than the S&P? Does that mean it’s better? And what makes the NASDAQ different from the others? The answer is really quite simple, it just comes down to properly defining some basic terminology!

The Dow, S&P 500, and NASDAQ Composite are all indexes. An index tracks the performance of a group of securities, like bonds or – in this case – stocks. Indexes are handy tools because they enable investors to compare current price levels for different segments of the market with past ones, so they can measure performance over time. Some indexes track extremely narrow segments of the market, like companies of a specific size or sector. Others are much broader. Let’s take a look at some of the most common ones you hear about - one at a time.

  • Dow Jones Industrial Average: This index tracks the performance of 30 of the most prominent companies listed on stock exchanges in America. (As of this writing, think Apple, Coca Cola, and Walmart, among others.) Because it is so narrow, the Dow isn’t always a good indicator of how the overall stock market is doing. But because the companies inside the Dow are so important or well-known, many people have money invested in them. That’s why the media pays so much attention to how the Dow is doing.
  • S&P 500: This index measures 500 of the largest companies listed on the American stock exchanges. (Quick note: A stock exchange is where traders actually buy and sell stocks. The New York Stock Exchange is the biggest and most famous, but there are many exchanges across the world.) Because the S&P 500 tracks so many more companies than the Dow, across a broad range of industries, it is often considered a more reliable snapshot of the overall economy than the Dow.
  • NASDAQ Composite: This index tracks nearly all the stocks listed on the Nasdaq Stock Exchange and is heavily weighted towards technology companies.
  • Russell 3000: You don’t hear about the Russell as much as the previous three, but this index represents nearly the entire U.S. stock market. It includes 3,000 of the country’s largest publicly held companies. (There are also Russell 1000 and Russell 2000 indices.)
  • S&P/TSX Composite: This is the most important index in Canada. It tracks the performance of the 250 largest companies listed on the Toronto Stock Exchange. You can think of it as the Canadian equivalent to the S&P 500.

Always remember that each index is measuring something different, which is why the financial media is always showing different averages for the different indexes when they talk about “how the stock market did today.” But why is the Dow always much, much higher than the S&P 500? We’ll cover that in our next blog! Spoiler: it all comes down to something called weighted average. After that, we’ll move away from stocks and look at other areas of personal finance.

At Riley Financial Strategies Group, stupid questions simply. don’t. exist! If you have a question you’ve been afraid to ask, call us at 800.677.4556 or click here!

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