Major US Stock Indices – History, Description and Application

US stock indices are summary values ​​that reflect the situation in a particular sector of the stock market.

For the first time, stock indices began to be used in the United States at the end of the 19th century, when Charles Dow compiled the Dow Jones Transportation Average based on information about 11 transport companies in America. It is used to this day and is calculated taking into account the activities of 20 freight carriers. There are also Dow Jones utilities and industrial indices, as well as a consolidated summary of all of them..

Major US stock indexes at the moment:

1. S&P 500 – Standard Agency Summary Index & Poor’s, which depends on the shares of 20 transport, 40 utilities, 400 industrial and 40 financial companies.

2. Dow Jones Industrial – an industrial index that takes into account the shares of 30 industrial giants.

3. NASDAQ 100 is the NASDAQ stock index.

4. Russell 2000 – Consists of shares of 2,000 small-cap US public companies.

5. CBOE Volatility Index – an index of volatility calculated on the Chicago Stock Exchange. It displays the expectation of market volatility, therefore it is often called the “fear index”.

S&P 500

This stock index consists of 500 US companies that have the largest capitalization. List compiled by Standard & Poor’s since 1957.

Shares of companies included in basket S&P 500, traded on major US exchanges: NASDAQ and NYSE. The index is considered by capitalization, and together with the Dow Jones is a key guide for investors. Sometimes he even uses the phrase “barometer of the US economy”.

However perceive S&P 500 as a list of US economic giants is wrong because it does not include projects with insufficient stock liquidity, as well as private enterprises. Moreover, the authors try to include companies from different sectors of the economy in the basket in order to fully cover it.

In s&P 500 includes shares of companies such as:

– Facebook Inc. [NASDAQ FB]
– Apple Inc. [NASDAQ AAPL]
– General Electric [NYSE:? GE]
– McDonald’s Corp. [NYSE:? MCD]
– Amazon.com Inc. [NASDAQ AMZN]
– Ford Motor [NYSE F] and others.

Dow jones industrial

It is the oldest market index in the world that was created by Charles Dow when he was editor of the Wall Street Journal. Using this indicator, it was proposed to monitor the development of the industrial sector of the American economy. The word industrial (industrial) is preserved in the name as a tribute to the time, although today not all companies from the Dow basket belong to the industrial sector.

Today, the Dow Jones calculation uses a scalable average – the total value of 30 shares is divided by a constantly changing indicator, the calculation of which depends on the number of shares in the index.

Many investors do not consider the Dow Jones a sufficiently authoritative index reflecting the exact economic picture and stock market behavior. As an alternative, many choose S&P 500, consisting of 500 rather than 30 player companies.

Another drawback of Dow Jones is that when it is calculated, the stock prices of individual companies are added up and then divided by the total ratio. Because of this, companies with expensive stocks often set the general mood for the entire basket..

This can be illustrated as follows: Let’s say the index takes into account the shares of 3 companies, the price of which is $ 1, $ 5 and $ 10, and the divisor is 0.5. Accordingly, the index is 8. If the shares with the highest price go down by 30%, the index will fall to 6.5, that is, it will lose 19%. If the cheapest stock doubles in price, the index will grow only to 8.5, i.e. by 6.2%.

Dow Jones includes shares in companies such as:

– American Express Co. [NYSE: AXP]
– Boeing Co. [NYSE: BA]
– Coca-Cola Co. [NYSE: KO]
– Intel Corp. [NASDAQ: INTC]
– Johnson & Johnson Inc. [NYSE: JNJ]
– WalMart Inc. [NYSE: WMT]
– Visa Inc. [NYSE: V] and others.

NASDAQ 100

This index has been calculated since 1985 and includes hundreds of American companies with the largest capitalization (excluding the financial sector). Since 1998, the index takes into account not only American companies. Most of the enterprises that are part of the NASDAQ 100 index basket are in the field of high technology, communications, Internet marketing and related areas..

The index includes the same companies that are present in the other mentioned indices, the same Facebook Inc. [NASDAQ:? FB] or Apple Inc. [NASDAQ:? AAPL], as well as other major projects in the sector.

The NASDAQ 100 now accounts for stock prices from companies in the United States, Canada, Singapore, India, Israel, China, Ireland, Switzerland, and Sweden..

For investors, the NASDAQ 100 is an authoritative indicator due to the fact that:

– It imposes very stringent requirements on its participants;
– Substantially dependent on global market sentiment;
– Approximately 10% consists of non-United States companies.

Russell 2000

This stock index is fundamentally different from the above because it displays the behavior of the shares of projects with a small capitalization (on average, about $ 255 million)

The index was published in 1987 by Russell Investments and was proposed for an objective assessment of the market for small companies. The significant increase in the cost and popularity of Russell 2000 in the 1990s was due to powerful jerks of companies from its basket..

Securities in the index are divided into two pools: Value and Growth (with low and high growth rates). It is noteworthy that in its history, Russell 2000 has reached the “deadline” 19 times (falling below the 200- and 50-day moving averages, after which a long-term market decline could have been observed), however, it always got out of the situation and showed good dynamics.

CBOE Volatility Index

This index has been calculated on the Chicago Options Exchange since 1993 and is designated as VIX. In simple words, this indicator shows the general market expectation for options on S&P 500. However, it is important to understand that VIX remains an assumption, not a guaranteed forecast..

The CVOE Volatility Index is inversely proportional to stock indices, that is, it increases with a falling market and decreases with an increase. So, for example, when the bulk of investors run away from risks in fear, VIX grows to 40-45 points. With quiet trading with a low general expectation of risk, it stays within 20 pips. A strong fall in volatility is perceived alarmingly, as all investors, obviously, expect its growth. Experienced experts recommend in this case to take profits.

The dependence of the volatility index on the market position reflects its growth well in the crisis years of 1997, 1998 and 2001, as well as in October 2008, when it reached a record of 89.53 points.