Financial analysis sounds rigorous, cold and brutally meticulous. It is hard to imagine more than one correct answer. Yet explaining trends and predicting market performance are often open to vigorous debate by multiple experts. In fact, numbers can tell us different things when we simply shift our perspectives on them.
This reality may, in part, explain why there are three major indexes that measure stock performance. Each approaches the ebbs and flows of stock values with a unique interest and will thus, on occasion, evaluate the movements of share values in divergent ways. What, then, are these most referenced indexes?
Dow Jones Industrial Average
Focusing on the stocks of the 30 largest companies in terms of scope and influence, the Dow Jones Industrial Average (DJIA) is the oldest and most well-known of the major stock indices in the world. Its primary characteristic is its price-weighted calculations, where the price per share is the starting point.
This basis has its pros and cons. On the downside, numerical changes in high-priced stocks will affect the index in a way that proportional changes in more modestly-priced stocks will not. At the same time, the DJIA is a good indicator of blue-chip, i.e. large, well-regarded companies, stock assessment.
Read More: Disadvantages of Blue Chip Shares
Standard & Poor's 500
Also known as the S&P 500, this different index in stock market measurement centers on 500 of the leading companies. The trait that most determines which companies get selected for the S&P is capitalization, i.e. factoring the cost of an asset over its entire productive life as opposed to treating it as an up-front expense.
As the stock market goes, capitalization is determined by multiplying total outstanding market shares by the current market price. The S&P also looks at liquidity and trading history when preferring stock.
The Nasdaq Composite Index
The Nasdaq is also a capitalization-oriented index, but it distinguishes itself in two ways. First, it targets primarily technology stocks. In addition, of the three major indices, the Nasdaq includes a larger percentage of overseas companies in its analysis. Among the technology companies under the Nasdaq microscope are software, biotechnology and electronics firms.
In contrast to the other two major stock indices in the world, the Nasdaq also includes a fair number of start-up ventures. In so doing, it is a good measure of investors' willingness to take risks on companies with little history.
Read More: What Does NASDAQ Consist Of?
Are There Other Reliable Indexes?
The MSCI USA Index looks at heavily and moderately capitalized companies – 628 in all. Among the most notable are Amazon, Microsoft, Tesla and Johnson & Johnson.
Overseen by the Financial Times Stock Exchange Group, the Russell 3000, as its very name indicates, takes a very broad view of stock activity. Examining 3,000 of the most heavily traded stocks, the Russell 3000 accounts for 97 percent of all equity securities incorporated in the United States of America.
Standard & Poor's, as well as Dow Jones, also maintain indexes of small-capitalization stocks.
Why Are Three More Important?
In fact, there are thousands of stock indexes out there. Clearly, investors and other interested parties cannot pay attention to all of them. The three major stock indexes are so named because they have the largest followings, pure and simple.
Equally as important as investor attention, media attention also gives these three indicators the heft they currently enjoy. This does not diminish the helpfulness and accuracy of many of the alternative indexes. Over time, nevertheless, the big three have proven to be consistently solid and dependable.
Read More: The Most Commonly Used Benchmarks for Investments