Christopher Best is a Miami native who is studying finance at Florida International University.
You invest in stocks to share in on the profits of capitalist economies. When you invest in stocks, you actually buy a part of a company. You do so through a stock market. You may often hear on the TV or the radio that the market is up or down, that the market is growing, or is ready for a fall.
When people and the media talk about the market, they usually refer to the United States stock market. The Dow Jones Industrial Average is the most widely watched measure of how the U.S stock market is doing. The Dow Jones Industrial Average was created by Charles Dow and Eddie Jones in 1896. The first version of the index was first published in 1885. Charles Dow was an editor and founder of the Wall Street Journal and co-founder of Dow Jones & Company. Edward Jones was an American statistician. Dow and Jones created compilations of important companies at the time and organized them into an index to reflect the performance of the market.
The Dow Jones Industrial Average monitors the performance of the stocks of thirty big businesses with headquarters in the United States. It includes companies such as Boeing, Coca-Cola, Verizon Communications, IBM, Intel, Pfizer, McDonald’s, and others. Obviously, the thirty stocks in the Dow Jones Industrial Average do not represent the entire U.S. stock market and all the different types of stocks available to investors.
Here are some other important indexes. Standard & Poor’s (S&P) 500 tracks the prices of five hundred stocks of major U.S. businesses. Their businesses account for over seventy percent of the total market value of all the stocks available in the United States. For this reason, the S&P 500 gives a much better representation of the market than the Dow Jones Industrial Average. S&P 500 is also calculated in a different way from the Dow Jones. The Dow index adds the prices of the shares of the companies on the index. The S&P 500 adds the total capitalization of its component businesses.
Russell 2000 measures the value of two thousand smaller U.S. business stocks across a variety of industries. While these stocks usually move in a similar pattern to the stocks of big companies, sometimes Russell 2000 does go in a different direction compared to the Dow or the S&P 500. For example, in 2000, Russell 2000 decreased 1.6% while S&P 500 went up 5.5%.
Wilshire 5000 index includes about four thousand American companies of all sizes from a number of industries and market segments. This causes some experts to believe that this index gives the best representation of the overall U.S. stock market.
Businesses, stocks and stock markets exist not just in the United States, but all over the world. Morgan Stanley EAFE index tracks the prices of stocks in many countries all over the world. EAFE is an abbreviation for Europe, Australasia, and the Far East.
If you are interested in a specific industry or market, you can probably find an index that suits your needs very well. Finance students such as Christopher Best learn a lot about markets and market indexes during their studies.