Sign in or Register

Already a member?

Sign in

Or sign in with your account on:

Not a member yet?


What are the DJIA, S&P 500, and Nasdaq?

By  +Follow January 12, 2014 8:00AM
Tickers Mentioned:

The three major indices have become an economic gospel of sorts. For decades, the Dow Jones Industrial Average, the Standard & Poor's 500, and the Nasdaq Composite have been the economic barometers of note, printed in every major paper, recited by rote by radio news announcers, and covered by major news outlets.

Even the least business friendly news programs typically make a point of at least listing their daily performance with a few major headlines before moving on to other things.

However, as is often the case with something as institutionalized as these indices have become, it's possible that people have come to overlook exactly what makes up these numbers.

It's like Mark Twain once said, "The classics are the books everyone knows but nobody reads." While a relatively small portion of the population can tell you that the Dow Jones is made up of the 30 most prominent industrial companies in the country, it's most likely an even smaller portion who can tell you how the index is calculated. What, exactly, does one point on the Dow Jones correspond to?

So, here's a closer look at what makes up these three major indices, how they're calculated, and what they really mean.

The Dow Jones Industrial Average (DJIA)

By far the oldest and most prestigious of the major indices, the Dow Jones dates back to 1896 when it was founded by Charles Dow, who was also the founder of the Wall Street Journal. Originally just 12 stocks, the index now sits at 30 companies and the "industrial" tag no longer applies as various different sectors are represented.

The 30 stocks that make up the index are selected by the editors of the Wall Street Journal and are intended to represent a cross section of the biggest and most prominent companies in the country. The only company that has remained on the index since its inception is General Electric (GE) , but the companies have always been prominent and recognizable names like AT&T (T) or Coca-Cola (KO) .

The actual calculation of the index is deceptively simple. The Dow is a price-weighted index, meaning that it's weighted by the price of an individual share for each stock. This is one of the major differences between the Dow Jones and the S&P 500, a market-weighted index, but more on that later. The index itself is calculated by taking the sum of the share prices for all 30 companies and then dividing that sum by the Dow Divisor.

The divisor is adjusted to keep things like stock splits or changing one of the companies in the index from affecting its overall value. The current Dow Divisor sits at 0.15571590501117. The Dow's simple formula and limited scope have brought it under criticism from many sources for not being nearly as accurate a representation of the market as a whole as the general public seems willing to accept, but its survival over more than a century speaks to the index having at least some value as a representation of America's biggest and most prominent companies.

The Standard & Poor's 500

The S&P 500 has existed since 1957, when it was created by financial services company Standard & Poor's. Like the Dow, the 500 companies that make up the S&P index are selected by committee, using clear standards but still not representing a rule-based selection process (like the one incorporated by the lesser-known Russell 1000, which takes the 1,000 companies in the country with the largest market capitalization). The S&P 500 does include some companies that are outside the United States, opting to include some previously American companies that have reincorporated outside the United States.

Unlike the Dow, the S&P is a market-weighted index, which means that the companies are weighted based on their overall size rather than their share price. This means that the movement of bigger companies will have a proportionally bigger effect on the index as a whole. If a company's market cap represent 1 percent of the total market cap of the index, the daily price change of that company should represent 1 percent of the index's move that day.

The S&P 500 is also a price return index rather than a total return index, meaning that dividends are not calculated into the index as returns. The S&P also uses a divisor in order to keep the index consistent over time and to smooth out the effects of corporate actions like buyouts, mergers, share issuance, and restructuring events. The divisor, though, doesn't change for stock splits because they don't directly affect a company's total market cap.

Weighting the index for market cap makes the calculation of the S&P significantly more complex than it is for the Dow. The index is recalculated every 15 seconds during the trading day, and the precise mathematics used are more complicated and elaborate than can be reviewed here.

The important factor to remember is that it's market-weighted, so the effect a company has on the index is directly proportional to that company's size. While still less prominent in the eyes of the public than the Dow, the S&P 500 has increasingly been seen as the index of note among industry insiders, and most fund managers are judged by their portfolio performance against the S&P 500.

By limiting itself to just 500 companies, the S&P still makes for a cross section of the biggest companies in America. However, it does have a much broader scope than the 30 companies on the Dow Jones, working in blue chips like Wells Fargo (WFC) or Oracle (ORCL) that aren't listed on the Dow.

The Nasdaq Composite

The Nasdaq Composite Index is not to be confused with the NASDAQ, the second largest stock exchange in the world behind the New York Stock Exchange. NASDAQ stands for the National Association of Securities Dealers Automated Quotations, and the exchange, founded in 1971, is an entirely electronic market. The index that is most commonly referred to simply as the Nasdaq is a composite index of the over 5,000 stocks that are listed on the NASDAQ exchange.

Like the S&P 500, the Nasdaq is market-weighted so that the shifts in the index are weighted to reflect the size of the companies involved. The composite is made up of all securities listed on the NASDAQ not including closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities.

The NASDAQ exchange is much more heavily weighted towards tech companies, meaning that the Nasdaq Composite can often be seen as leaning in the same way. Also, because it includes so many more components, the Nasdaq also includes small cap and speculative stocks in its index, making it significantly different from the two other major indices which include only large companies that are well established.

As such, the Nasdaq's value as a predictive index for the American economy is qualitatively different from the Dow or the S&P. The inclusion of so many different companies gives the Nasdaq a far broader base. However, because it's limited to one exchange, it also means that the index reflects a specific segment of the American economy.

The Nasdaq index is often broadly viewed as being largely reflective of the tech sector, but the inclusion of more speculative companies also means that it can also be seen as partially representative of the small cap market as well.

The rise of major tech firms over the last few decades has meant that the NASDAQ exchange is now home to some of the biggest players in the market, including Apple (AAPL) , Google (GOOG) , and Microsoft (MSFT) .

Which Index Best Represents the Total Market?

In short, none of them. Each index represents a different slice of the American equities market and it would be foolish to think that any one can really be reflective of the market as a whole or the direction of the American economy. This may be why the three are most often reported together. While none may be perfect, looking at each three, and understanding what goes into them, can allow for a broader, more nuanced picture of the day's trading to emerge.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

Liked What You Read? Join Equities.com and Connect With Your Favorite Financial Experts FOR FREE! Members of Equities.com gain access to our leading financial news and content, active social investment community, proprietary research tools including the 2014 Small-Cap Stars, E.V.A. reports and more.

Results for ko
Matt Stoller
21 Oct 14 08:05:05
RT @DougKass: Sugar water is this generation's cigarettes. $KO
21 Oct 14 07:57:19
Glad I sold $KO to buy $PEP
21 Oct 14 07:57:04
Stocks to watch: $HOG $MCD $KO $VZ all report earnings today - http://t.co/v5h2WMgBt2 via @WSJMoneyBeat
21 Oct 14 07:56:41
@is_matrix $KO . . . . Glad I don't own it!
Marina Strauss
21 Oct 14 07:55:04
the fizz is out of Coke /Coca-Cola expands cost-cutting measures as profit tumbles 14% http://t.co/Qdh4iIT1l3 $KO $PEP
Fortune Magazine
21 Oct 14 07:50:05
Coke reports an earnings slide, expands its cost-cutting program http://t.co/zFNX6HjSWw $KO
Vonnie Quinn
21 Oct 14 07:48:39
Matrix's Katz says he'd rather own $KO than any kind of bond, in spite of today's warnings. Says dividend yield will increase to 3.2/3.3%.
Dan Weidelich
21 Oct 14 07:45:34
Market seems to be recognizing that Blue chip companies are no longer a thing... $IBM $KO #startupworld
21 Oct 14 07:43:48
Mr. Market I bow to thee - my $KO puts worked, but that dip I saw coming never came - just a massive rip
David Nelson
21 Oct 14 07:38:39
$KO $MCD - no axe to grind or position but how does restructure work if customers don’t want your products anymore @CNBC
Carl Quintanilla
21 Oct 14 07:34:57
"They pushed volume for so many years, supersized everything," and they're paying the price for that. - Levy, on @CNBC $KO
Carl Quintanilla
21 Oct 14 07:34:09
"I do think this is going to be a real long haul to get where they want to be" - CLSA's Caroline Levy, on $KO. @CNBC
Steven Russolillo
21 Oct 14 07:33:46
Coke shares down 6.5%, on track for worst day since 2008, 15th worst performance over past 30 years, per @FactSet (h/t @KevinKingsbury) $KO
21 Oct 14 07:27:36
@BarbarianCap A billion here and a billion there, eventually it adds up. $IBM $KO
Connie Sullivan
21 Oct 14 07:26:00
Facebook Among 5 Top Stocks For Any Economy http://t.co/vtPN9kKj0a #IBDNews via @IBDinvestors $FB $AKRX $CMG $GMCR $DPZ $HAIN $WFM $KO
lord of trading
21 Oct 14 07:24:31
$KO Is Off Over 6% Already: Whoo http://t.co/eK2s5uDs0e
Todd Sullivan
21 Oct 14 07:23:10
Of course, $KO is only down ~$1 YTD and Warren is getting a $1.24 annual dividend on 400M shares...so....
Seeking Alpha
21 Oct 14 07:20:00
Today's Market: Why Is The Market Not Giving These Stocks Any Respect? http://t.co/r1d26kRXci $AAPL #APPLE $ABBV $IBM $KO $MCD $SHPG
Downtown Josh Brown
21 Oct 14 07:19:38
@SallyPancakes meant $KO
Steve Mahoney
21 Oct 14 07:19:20
@carlquintanilla @GiovannyMoreano @CNBC Healthy Drink Anyone? In Colorado...Health is Important - Coke vs. Tea vs. <Healthy TBD> $KO Oops
21 Oct 14 07:16:53
NEW POST: Let it Rest http://t.co/HuQhHrDsc1 $AAPL $CMG $KO $QQQ $SPY
Roger Attick
21 Oct 14 07:15:02
“@carlquintanilla: Worst day for Coke. (via @GiovannyMoreano) $KO @CNBC” : Ironic that #coke launched a program to recruit #entrepreneurs
Squawk on the Street
21 Oct 14 07:14:58
RT @carlquintanilla: Worst day for Coke in 6 years. (via @GiovannyMoreano) $KO @CNBC
Ben Berkowitz
21 Oct 14 07:14:40
$KO is having its worst day since Oct. 2008, and Buffett's out $1.09 billion at current levels. http://t.co/3COyquUF4B
Giovanny Moreano
21 Oct 14 07:11:46
RT @carlquintanilla: Worst day for Coke in 6 years. (via @GiovannyMoreano) $KO @CNBC
Carl Quintanilla
21 Oct 14 07:11:37
Worst day for Coke in 6 years. (via @GiovannyMoreano) $KO @CNBC
21 Oct 14 07:10:53
$KO sees a surprise revenue drop, notes that it will focus on cost-cutting as soda demand slows worldwide
Todd Sullivan
21 Oct 14 07:08:12
Buffett's $KO investment has been "decimated" ... now "only" sitting on a $14B gain in it.. #savewarren
21 Oct 14 07:06:05
$IBM $KO old school is out. sheesh.
Dividend Master
21 Oct 14 07:05:44
$KO still absurdly overvalued @ 20PE with dead flat revenues & earnings since since 2011 ( as is $PEP ) . Even a reprice to 16PE just OK
21 Oct 14 07:03:48
so was warren in the bathtub eating a $MCD burger drinking a $KO coke when he got the news about $IBM
Z. Bodag
21 Oct 14 07:02:47
So $IBM, $KO and $MCD warning and markets up sharply with low volume??
Blue Horseshoe
21 Oct 14 06:59:38
$KO analysts concerned that incremental productivity savings being reinvested back in marketing instead of returned to shareholders.
The Fly
21 Oct 14 06:51:17
$KO Coca-Cola sees 2015 as 'critical' year of transition: Full Story http://t.co/nCrIwnEVyZ
Herbert R Tarlic Jr
21 Oct 14 06:51:10
I am liking the looks of a short 40 put on $KO.
21 Oct 14 06:51:09
Coca-Cola Co profit falls; company expands cost-cutting. $KO. http://t.co/e6rgYruF9a
Candice Choi
21 Oct 14 06:51:06
Coke's soda volume declined in North America, but smaller sizes like "mini-cans" helped boost revenue. $KO
Brian Kelly
21 Oct 14 06:50:21
$IBM $KO and $MCD all highlight the dark side of buybacks...lack of reinvestment hollows out a company
Wall St. Tigers
21 Oct 14 06:49:49
Early movers: $MCD, $VZ, $KO, $UTX, $HOG, $CMG & more http://t.co/1l8xuF4011 #Stocks #Trading #StockMarket #Forex #Dow #NASDAQ #SP500 #DIJA
21 Oct 14 06:49:38
$KO: Coca-Cola reports EPS in-line, misses on revs; sees FY14 and FY15 results below long term targets (lowers top... http://t.co/5Gj2I10Anv
Downtown Josh Brown
21 Oct 14 06:41:25
21 Oct 14 06:40:34
Coca-Cola $ko #Wearable #Tech #EmergingGrowth http://t.co/Zl5qkPOicF #coke #wearables #smartwatch #investing #iwatch $aapl #samsung #stocks
Ben Berkowitz
21 Oct 14 06:38:43
Warren Buffett lost almost $1B on $IBM yesterday and he's down another $1B roughly on $KO today http://t.co/Fx2bvgJORK
21 Oct 14 06:33:36
Enormous gap down for Coca-Cola at the open. It's down 5% after missing its revenue estimates -> http://t.co/nzusRrCQMD $KO
Menno van Hoven
21 Oct 14 06:33:22
Na gisteren $IBM vandaag weer een vervelende dag voor Buffett met Coca-Cola, dat ruim 5% verliest. $IBM vandaag ook weer lager (-2%). $KO
21 Oct 14 06:30:34
Other than $AAPL many key corps r not meeting ERs expectations $NFLX $EBAY $GOOGL $IBM $MCD $KO but as long as CB floor I guess dont matter
21 Oct 14 06:29:27
$cmg weak guidance, $aapl inline numbers $mcd $ko $vz all weak - mkt getting huge bubbly on some weird ECB news!!
Angela Zhou
21 Oct 14 06:28:43
$SPX gaps up on $AAPL ER beat after huge bounce from capitulation selling, but may see profit taking. Can't ignore ER miss on $CMG $MCD $KO.
21 Oct 14 06:28:41
Pre-Open Stock Movers 10/21: $NEON $ILMN $HOG $AAPL Higher; $RNO $KO $MCD Lower (more...) http://t.co/OAoZCGqlch
Barbarian Capital
21 Oct 14 06:20:39
$KO vs the bottlers, Oct 7 2014... even CCE has sunk since https://t.co/U2XYTzI027
By  +Follow January 12, 2014 8:00AM



blog comments powered by Disqus

About us

Equities.com is the most advanced interactive online social ecosystem for the financial industry, serving as a resource center and next-generation communication platform that connects self-directed investors with public issuers, market experts, and professional service providers and vendors. Registered members can leverage our exclusive proprietary research tools such as the Small-Cap Stars, which outperformed 90% of all small-cap mutual funds, and robust do-it-yourself E.V.A. research reports. The Equities.com Issuer Dashboard is the ideal tool to communicate and manage investor awareness campaigns to the investment community, as well as to access valuable resources to help your company grow.

Market Data powered by QuoteMedia.
Copyright © QuoteMedia. Data delayed 15 minutes unless otherwise indicated. Terms of Use.