A number of different stock indices exist in the US. Some of them try to represent what is happening in the entire stock market, while others focus on giving a picture of a specific sector.
A few different companies are active in developing these indices and they own the rights to the products they create. Most of the companies have a flagship index that represents the economy as a whole, along with lesser known indices that illustrate specific sectors.
The companies constantly update their indices according to changes in the prices of their component stocks. As well, periodically, they change the make up or structure of the index to keep it inline with economic and market developments.
The stocks that make up a given index are called index components. Each component has a certain weight in the index. An index where the weight of a stock is proportional to its price is called a price-weighted index, and one where the weight is proportional to market cap is called a capitalization-weighted index. Most of the important indices are capitalization-weighted.
We will elaborate on three of the most important indices.
- The Dow Jones Industrial Average.
- The Standard & Poor’s 500.
- The NASDAQ Index.
We will also summarize some of the other popular indices.