Secret Fund Managers

The Market

People talk about the “Market” like it was a single investment area, but you have probably already worked out that this is not the case. So let’s go through the “Market” and see some of the different indexes that are out there.

 Market Index

First off let’s begin with what a stock market index is before we get into the separate indexes themselves. A stock market index is a listing

of stocks, chosen to represent a portion of the market, so it is also a statistically created number reflecting the composite value of the stocks.

For weights to create these composite numbers, some indexes use Price, and some use Market Value. The index itself is a tool to gain an

overview of how sections, industries or portfolios (such as mutual funds), are doing at any given time. The most regularly quoted market

indices are broad-base indices, such as the American Dow Jones Industrial Average and S&P 500 Index, the British FTSE 100, the French CAC 40

and the Japanese Nikkei 225. More specialized indices exist, tracking the performance of specific sectors of the market.

The Morgan Stanley Biotech Index, for example, consists of 36 American firms in the biotechnology industry. Other indices may track companies

of a certain size, a certain type of management, or even more specialized criteria- one index published by Linux Weekly News tracks stocks of

companies that sell products and services based on the Linux operating environment. A notable specialized index type is those for ethical investing

that include only those companies satisfying ecological or social criteria, e.g. those of The Calvert Group, Domini, Dow Jones Sustainability Index

and Wilderhill Clean Energy Index.

 The Dow

The Dow is one of several stock market indices created by Wall Street Journal editor and Dow Jones & Company founder Charles Dow.

Dow compiled the index as a way to gauge the performance of the industrial component of America’s stock markets. It is the oldest continuing U.S. market index.

Today, the average consists of 30 of the largest and most widely held public companies in the United States.

To compensate for the effects of stock splits and other adjustments, it is currently a weighted average, not the actual average of the prices of its component stocks.

 NASDQ

NASDAQ (originally an acronym for National Association of Securities Dealers Automated Quotations) is a U.S. electronic stock market.

It was founded by the National Association of Securities Dealers (NASD) who divested it in a series of sales in 2000 and 2001.

It is owned and operated by The Nasdaq Stock Market, Inc. NASDAQ: NDAQ which was listed on its own stock exchange in 2002.

When it began trading on February 8, 1971, it was the world’s first electronic stock market. On July 17, 1995 the NASDAQ stock index closed

above the 1,000 mark for the first time. The index peaked at 5132.52 on March 10, 2000, which signaled the beginning of the end of the dot-com boom stock bubble.

The index declined to half its value within a year and is still valued at less than half its peak. However, NASDAQ is now the largest U.S. electronic stock market.

 S&P 500

The S&P 500 is a list of 500 US corporations, ordered by market capitalization. The list is owned and maintained by Standard & Poor’s.

The market-value weighted performance of the stocks of these companies is known as the S&P 500 index.

After the Dow Jones Industrial Average, the S&P 500 is the most widely-watched index of large-cap US stocks.

Many index funds and exchange-traded funds track the performance of the S&P 500 by holding the same stocks as the S&P 500 index, attempting to match its performance.

Partly because of this, a company which has its stock added to the list may see a boost in its stock price as mutual fund managers are forced to purchase that company’s

stock in order to match their index funds’ composition to that of the S&P 500 index.

 Russell Index

The Russell Indexes (yes, Russell uses “Indexes” rather than “Indices”) are a set of stock market indices of listed US companies. The main index is the Russell 3000 Index,

which is divided into several sub-indexes. The list of stocks in the Russell 3000 is managed by the Russell Investment Group. Russell forms its indexes by listing all US companies

in descending order by market capitalization. The top 3,000 stocks (those of the 3,000 largest companies) make up the broad Russell 3000 Index. The top 1,000 of those

companies make up the large-cap Russell 1000 Index, and the bottom 2,000 (the smallest companies) make up the small-cap Russell 2000 Index.

The indexes are rebalanced, or “reconstituted”, once each year, on the last Friday in June. The reconstitution consists of updating the list of the largest 3,000 companies

and assigning them to the appropriate indexes. Unlike the S&P 500 Index, the Russell indexes do not immediately replace a company that merges with another firm or has

its stock unlisted. This means that, for most of the year, the Russell 3000 Index has fewer than 3,000 companies in it. For instance, if a company from the index is unlisted in July,

that will be an empty spot in the index until the following June. The annual June rebalancing brings the total back up to 3,000. Many investors use mutual funds or exchange-traded funds based on the Russell Indexes as a way of gaining exposure to certain portions of the US stock market. Additionally, many investment managers use the Russell Indexes as performance benchmarks to measure against.

Indexes are useful tools for tracking trends, and getting quick views of what is going on with separate segments. Most agree that it is the S&P 500 which gives the most accurate At-A-Glance overview of the U.S. Market trends and movements. What is best for you depends on the type of investing you wish to do.

This entry was posted on Monday, August 18th, 2008 at 2:54 am and is filed under Diverse Investing, Investing Basics, Investing Money, Investing Secrets, Investing Tips, Stock Investing, Stock Market Investing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.