As you begin investing, you will frequently overhear investors or news channels refer to the Dow Jones or S&P 500. These statements have become commonplace in the world of investing since they are indicators to the strength of the stock market and U.S. economy.
These indicators are called stock indexes. In the U.S., there are three main indexes: the Standard & Poor 500 (S&P 500), the Dow Jones Industrial Average, and the NASDAQ Composite. Each index consists of a different batch of stocks that can indicate how well a certain sector might be performing.
The S&P 500 is the most widely used since it evaluates the performance of 500 large companies listed on stock exchanges in the U.S. For investors, the index is often used as a benchmark or baseline for comparing returns on investment.
The Dow Jones index is another large index that contains 30 prominent companies that are selected subjectively by the editors of The Wall Street Journal. That’s right, the editors!
Lastly, we have the NASDAQ Composite, which is known to be heavily weighted in the technology industry. We mentioned the NASDAQ in the stock exchange Bite earlier and the NASDAQ Composite is made up of most of the stocks that are listed on the exchange.
Despite indexes being used more as an indicator, they can be bought and sold too. These tradable indexes are called index funds, which is up next!