The three most powerful terms in Wall Street
“The S&P 500,” “the NASDAQ,” and “the Dow Jones” are the three most powerful terms heard around Wall Street. They describe particular market indices.
A market index gives you a summary of the overall market by tracking some of the top stocks within that market. Its usefulness lies in its ability to provide a representative snapshot of the overall market’s direction.
The S&P 500
The S&P 500, an NYSE index, tracks the 500 largest U.S. companies across a wide span of industries and sectors. The index uses a market cap weighting structure, which means its performance is more weighted towards companies with higher market values. This also means that exchange-traded funds (or ETFs) like the SPDR S&P 500 ETF (SPY) that track this index give their highest allocations to large-cap companies like Apple (AAPL), Exxon Mobil (XOM), and General Electric (GE).
The Dow Jones
On the contrary, the Dow Jones Industrial Average is a price-weighted index of 30 blue-chip U.S. stocks. It’s the oldest continuing U.S. market index. As it’s a price-weighted index, stocks with a higher price get more weight and therefore have a greater influence over the index’s performance. This explains why companies like Visa (V), whose stock price closed at $215.77 as of September 8, and Goldman Sachs (GS), whose stock price closed at $180.11 as of September 8, have a larger allocation in the SPDR Dow Jones Industrial Average ETF (DIA), which tracks this index.
Finally, “NASDAQ” refers to both an index and a trading exchange. There’s an electronic NASDAQ exchange, where investors buy and sell stocks, and there’s a NASDAQ market index that tracks the roughly 3,000 companies that trade on the exchange. The market index is commonly known as the “NASDAQ Composite.” Though the exchange does trade some banking companies, airline companies, and even a few other businesses like Starbucks (SBUX) and Steve Madden (SHOO), the NASDAQ’s virtual trading floor seems to be more crowded with tech companies, like Apple and Google.
The NASDAQ-100 is another popular index that includes 100 of the largest domestic and international non-financial companies listed on the NASDAQ Stock Market based on market capitalization. The PowerShares QQQ Trust, Series 1 ETF, (QQQ) tracks this index.