Wednesday, July 22, 2009

What do the Various Stock Indices Measure?

The Dow Jones Industrial Average (known as the DOW) is an indicator of stock market prices based on the share values of 30 of the largest and most widely held blue-chip stocks traded on the New York Stock Exchange (NYSE). Each of the 30 Dow components influence the value of the index equally. Develop by Charles Dow, the DJIA is the oldest and most widely used market indicator. Changes are occasionally made to the 30 stocks tracked to keep the index representative of the broad market.

The NASDAQ is the largest electronic trading market in the United States. The NASDAQ Composite Index tracks the value of the approximately 5,000 stocks traded on the NASDAQ market. This index consists of mainly technology stocks, so it is not an accurate indicator of the US equities market as a whole.

The Standard & Poor’s 500 stock index (S&P 500) is a measure of a basket of 500 widely-held stocks listed on the New York Stock Exchange. This index is generally considered to be most representative of the U.S. stock market as a whole. As a value-weighted index, the S&P 500 is more heavily influences by larger companies than smaller firms.

The MSCI EAFE index represents market movements in developed countries outside North America. Most countries represented are located in Europe, Australia, and the Far East. The EAFE index is widely accepted as the best indicator of international stock markets.

Most market indices only account for the current selling price of the measured stocks, and do not consider dividend payments. The failure to include dividend payments means that the annual percentage change of the indices underestimates the true return.

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