Investors utilize stock indexes to keep informed of the performance of the overall market or individual sectors, and as a benchmark to monitor performance of their own investments. Stock indexes are used as an investment tool all over the world due to its efficiency, ease of use and low cost.
Dow Jones Industrial Average
The Dow Jones Industrial Average is the oldest and most popular of the stock indexes in the market today. It began on May 26, 1896, when Charles Dow listed 12 stocks into the index. The index is now composed of 30 stocks and is representative of many different sectors of the U.S. economy despite the word "industrial" in the title.
The Dow Jones Industrial Average is a price weighted index and is calculated by adding the prices of all 30 components and dividing the sum by a divisor that is maintained and updated by the Dow Jones Company, the owner of the index.
The only original member of the Dow Jones Industrial Average that is currently still in the index is General Electric, but this stock was taken out twice, in 1898 and 1901, and then put back into the index. Citigroup and General Motors were removed from the Dow Jones Industrial Average in June 2009, and replaced by Travelers, Inc. and Cisco Systems, Inc.
Standard and Poor's 500 Index
The Standard and Poor's 500 Index is an index of 500 large cap common stocks that represent all different sectors of the market. Stocks must have a minimum market capitalization of $3 billion to be included in the index. The index is a capitalization weighted index where stocks with a larger market capitalization have more weight in the index.
NASDAQ 100 Index
The NASDAQ 100 index is the third major stock index. This index is composed of the largest 100 companies that trade on the NASDAQ exchange excluding financials. The index was started in 1985, and is primarily a capitalization weighted index, which means that larger stocks have more weight in the index.
Buying the Indexes
Buying all the individual stocks in these indexes is not the most efficient method of owning this index, so an investor should buy an exchange traded fund (ETF) to replicate the performance of each of the three indexes.
More About Exchange Traded Funds
There are several options when it comes to exchange traded funds. The DIAMONDS Trust Series 1 trades under the symbol DIA, and tracks the performance of the Dow Jones Industrial Average. The S&P Depository Receipts, or SPDRs, trades under the symbol SPY, and tracks the performance of the S & P 500. The PowerShares QQQQ Trust trades under the symbol QQQQ and tracks the performance of the NASDAQ 100.