Definition and Example of S&P 500, Nasdaq, and Dow
The S&P 500, Nasdaq, and Dow indices are examples of market indices. The index provides a summary of the market by tracking a sample of the major stocks in that market.
How do the S&P 500, Nasdaq, and Dow Indices Work?
Each index operates slightly differently. The stocks listed in the Dow index change from time to time. Amgen, Honeywell, and Salesforce were added in 2020, while ExxonMobil, Pfizer, and Raytheon exited. In its early days, when it consisted of only 12 stocks, the Dow averaged the prices of those stocks. The formula has changed over the years to give higher-priced stocks greater weight than lower-priced stocks.
The S&P 500 is also market-cap weighted, using float-adjusted market capitalization, meaning it only considers the shares available in the market.
Nasdaq, like the S&P 500 and Dow, uses a weighted methodology to calculate its value. It is updated continuously throughout the day, but the value recorded at 4:16 PM Eastern Time is the official value for any given day.
Alternatives to S&P 500, Nasdaq, and Dow Indices
Although the S&P 500, Nasdaq, and Dow are the most well-known, they are not the only indices. Other commonly tracked indices include the Wilshire 5000 and the Russell 2000.
The Wilshire 5000 index represents up to 5,000 companies of all sizes, from giants to the smallest small caps. It is often referred to as the total market index due to the broad range of stocks included. At least one study suggests that the Wilshire 5000 is the best representation of the overall U.S. market. However, it is smaller than the Dow, which dates back to the 19th century.
The Russell 2000 index does the opposite of the Dow by tracking only the smallest companies. This index follows the 2,000 smallest players in the market. If you think 2,000 companies are too small a sample and you’re looking for a larger and more representative snapshot of small-cap performance, you may also check its sibling index, the Russell 3000.
Source: https://www.thebalancemoney.com/the-sandp-500-nasdaq-dow-jones-what-is-this-stuff-453745
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