Monday, October 3, 2016

31 Days to Financial Savvy: Understanding the Market Indexes

Newscasters often say things like "The Dow is up" or the "Nasdaq fell today." If you think that sounds a lot like alphabet soup, you're not alone. Let's figure out exactly what the letters means. 

The NYSE and Nasdaq
Stocks are traded on one of two New York exchanges: the New York Stock Exchange (NYSE) or the Nasdaq. The NYSE was founded in 1792 and is located at 11 Wall Street in Manhattan. It's an open auction style market and is the one we see on TV, with the flurry of activity taking place on the trading floor. The NYSE is open Monday through Friday from 9:30 a.m. to 4:00 p.m. EST. Its hours are marked by an opening and closing bell. 

The Nasdaq Stock Exchange was founded in 1971 and is an electronic market, with the orders and transactions being computer-based. Because it's electronic, it has longer hours. The Nasdaq has 4000+ stocks listed on it. 

Stocks are typically listed on either the NYSE or the Nasdaq, not both. Companies need to pay to be listed on the exchanges, with the entry fee for the NYSE being up to $500,000. Additionally to be on the NYSE, a company must have: more than 2200 shareholders; more than 100,000 shares must be traded on a monthly basis; a market valuation of over $100 million; and more than $75 million in revenues annually. Companies that don't meet this high threshold can be de-listed. Consequently, smaller companies, particularly start-up tech firms, list on the Nasdaq because it has a much smaller list fee and less stringent thresholds. 

Market indexes measure the value of groups of stocks. There are three main market indexes: the Dow, the S&P 500, and the Nasdaq. While all these indexes are measuring the stock market, they each do so in different ways.  (Note: both "indexes" and "indices" are acceptable plural forms for the word index, so you may see them used interchangeably in financial literature.)

The Dow 
The Dow Jones Industrial Average, known as the Dow or DJIA, is the oldest stock market index, having been established in 1896.  It averages the stock market value of 30 large, publicly-owned U.S. businesses. Members of the Dow are all well-recognized names: Bank of America, Chevron, Wal-mart and Walt Disney. The index is what's called a "price-weighted average," meaning that companies with a higher share price have a larger impact on the Dow's movements. Because the Dow focuses on large businesses, it's composed mainly of companies found on the NYSE, with only a new nasdaq stocks.  

The S&P 500
The Standard & Poor's 500 is considered a broader indicator of the markets because it looks at 500 companies, instead of 30. The S&P is the index for the 500 most widely traded stocks on both the NYSE and the Nasdaq. The companies on this index are weighted by market cap, and the market cap must be above $5 billion. "Market cap" or market capitalization refers to the total market value of all of a company's outstanding shares. 

The Nasdaq Composite
Both the Nasdaq Stock Exchange and the Nasdaq Composite Index are commonly referred to as just the Nasdaq. Because many of the tech companies are traded on the Nasdaq Stock Exchange, the Nasdaq Composite is often known as the tech index; however, non-tech are companies traded on the Nasdaq Stock Exchange, too. They are just represent a smaller component of this index. Because the Nasdaq Stock Exchange includes smaller and more speculative companies, this index is more volatile than either the Dow or the S&P 500.

1 comment:

  1. It's been a few days since I checked the blog, so I was a little baffled why you were talking about the NYSE. I'm with you now!

    One thing I plan to let our kids do when they get older is buy a couple of shares of various stocks so they can see the market play out first-hand.

    - K.