Overview of US Stock Market Indices

Stock investments are a great way to generate wealth, both in the short and long term. The key here is diversity. As such, many decide to invest in stocks and securities outside India, and in the US stock market. 

 

However, before exploring international markets, you must understand the indices. Knowing how a US stock index works helps identify the trends, enabling you to make informed decisions.

 

Read on to learn about the US stock market indices and make smart investment decisions.

• Nasdaq Composite

Nasdaq is a US stock market index name that every investor, whether a beginner or an expert, should know. It tracks about 3,000 stocks in the technological sector and subsectors such as biotech, software, and more. 

 

The index weighting is market cap and includes companies of all sizes, even outside the US. 

 

The index also includes some speculative companies. As such, the performance indicates not just the performance technology sector but also the attitude that investors have about speculative stocks. 

 

Top companies that form a part of the Nasdaq Composite index are Apple, Facebook (Meta), Netflix, Microsoft and more.

• Standard & Poor’s 500 (S&P 500)

One of the most widely used stock indices, the S&P 500, has market-cap weighting and gives an overview of the top 500 companies in the US. Along with market cap, the index committee also considers other factors such as sector classification, liquidity, trading history, financial viability, and public float. 

 

With 500 companies, this American stock index represents around 80% of the American stock market. Given the composition of the index, many investors see S&P 500 as one of the most accurate representations of overall stock market performance. 

 

The top companies that are a part of the index are Johnson & Johnson, Apple Inc., Berkshire Hathaway Inc., and Microsoft Corporation.

• The Wilshire 5000 Total market index (TMWX)

With market-cap weighting, this index includes companies that are publicly listed and headquartered in the US. As such, the index is known as the ‘Total Market Index’. Established in 1974 by Wilshire Associates, the index represents the performance of the US stock market on an aggregate basis.

• Dow Jones Industrial Average (DJIA)

A price-weighted US share market index, this index represents around 30 of the major and most influential companies in the US. Representing about 1/4th of the value of the US stock market, the index depicts investors’ earnings expectations and the risk of the companies listed in it.

 

While the index does not represent the US stock market on a broader level, it represents the dividend-value, blue-chip market. The top companies included in the index are Chevron, Goldman Sachs, Intel, IBM, Nike, Walt Disney, and more.

 

A crucial point to remember is that you cannot invest in the US share market index. Rather, you can invest in avenues that track these US indices. By doing, you can ensure that you inject reliable returns into your portfolio.

 

With a myriad of stock market indices, be sure to research and assess the avenues you intend to invest in from all angles. Choose an option that tracks the performance of your preferred non-US or US stock index and secure the returns you want.

Before delving into the importance of stock market indices, it is essential to understand what a stock market index is. In simple terms, the index is a hypothetical stock portfolio where the calculation and formation vary for every non-US or US share market index. 

 

Every portfolio or index represents a certain area/ sector of the market, and its performance gives an overview of the performance of the particular sector. As such, stock market indices give an idea about how the economy, a particular sector/ industry, is performing.

 

Given this, a stock market index is one of the crucial aspects that investors, whether amateur or expert, look at for their investment decisions. Based on the information and the performance, you can gauge whether investing in that particular avenue is a good option for your finances.

As mentioned above, a stock market index is a portfolio of shares and investment avenues of different sectors. The index tracks the performance of these sectors, helping you look at past performance and invest accordingly.

 

As such, these indices are often the benchmark of performance for different investment avenues, allowing you to understand whether your investment is underperforming. 

 

To help you understand, here is an example: 

Consider an index that tracks the produce sector, and the current average price is ₹5 for a dozen products. 

 

Suppose the starting value of the index is 1, and after a few months, the price for a dozen products increases to ₹7.50, i.e., by 50%. As such, the index value increased by 50% and by ₹1.50. 

 

This increase in index value tells you how the particular sector is performing.

 

Based on the current performance and historical data, you can understand whether investing in that particular sector is good or not. Do keep in mind that the change in index performance depends on index weighting – market-cap, equal, or price.