What Are Stock Market Indexes? And What Can Each One Tell You?

You’ve likely heard of the Dow Jones and the S&P 500. But what exactly do these indexes mean?

Today you’ll learn exactly what the indexes are and what you can learn from each one.


Photo by Markus Spiske from Pexels

Stock market indexes are hypothetical portfolios representing a segment of the market.

We use four major indexes to track the strength of the market. Let’s touch briefly on each one so you gain a better understanding…

The Dow Jones Industrial Index

Also referred to as the “The Dow” or the “Dow 30,” tracks just 30 stocks.

Each stock is a large-cap worth hundreds of billions of dollars.

It’s arguably the most famous index. It has the biggest number, currently near 30,000 but it represents the least amount of stocks of any major indexes.

Stocks that are represented in the Dow include:

  • Apple (AAPL)
  • McDonald’s (MCD)
  • Visa (V)
  • Merck (MRK)

The Dow provides a good cross-section of industries — but it only includes the industry leader.

Given the low number of stocks in the index when one stock performs exceptionally well — or poorly — it can skew the index as a whole. 

The small number of stocks limits what can be learned from watching this index.

Chart showing market cap comparision for the Dow Jones index.

In terms of market cap, the 30 stocks in the Dow make up 23% of the total U.S. market.

Respectable, but not a great indicator of the entire market.

You can track the Dow with tickers DJI and DAI.

Nasdaq Composite Index

The Nasdaq Composite, or Nasdaq for short, represents a broader measure of the market. It contains the largest number of stocks of any index we’ll look at today—over 3,700.

Every stock that’s listed on the Nasdaq exchange is represented, to some extent, in the Nasdaq Composite.

But the index is weighted by market cap. That means the bigger companies have a much larger effect on the index.

Since the Nasdaq exchange tends to host more technology companies the index does best when technology stocks do well.

And despite having more stocks than the New York Stock Exchange (NYSE) … The Nasdaq represents less market cap.

Chart compare number of stock and market cap in the NYSE and Nasdaq

Financial and industrial stocks tend to list on the NYSE and therefore have little representation in the Nasdaq Composite.

Notable stocks on the Nasdaq include:

  • Apple (AAPL)
  • Microsoft (MSFT)
  • Amazon (AMZN)

You can track the NASDAQ using ticker IXIC for the whole index, or QQQ for the largest 100 stocks on the index.

The S&P 500 Index

S&P 500 is one of the best measures of how the broader market is doing.

The S&P 500 represents the leading 500 U.S.-based companies.

And while it contains just 500 companies, only 8% of all stocks … It represents 80% of the total market cap.

Chart comparing number of stock to market cap in the S&P 500

Every stock mentioned above is also included in the S&P 500.

A few other household names include:

  • Nike (NKE)
  • Texas Instruments (TXN)
  • Moderna (MRNA)
  • Under Armour (UA)

For tracking use ticker GSPC or SPY.

OK, we’ve covered the “big three.” But from time to time we’ll refer to the big four indexes.

The 4th is…

The Russell 2000

This index is derived from another larger index, the Russell 3000.

The 3000 represent about half of all listed stocks. But about 97% of the total market cap.

Of course, we’ve made up a few charts to illustrate this point.

Chart showing index overlap between the Russell 3000, 1000, and S&P 500.

You’ll notice the S&P 500 overlaps a portion of the Russell 1000 and 3000. 

As shown, the Rusell 2000 represents the bottom two-thirds of the top 3000 stocks.

Now take a look at how the market caps compare…

Chart comparing market cap in the of various indexes.

The Russell 2000 represents only about 8% of the total market cap.

Another interesting point we can take from this chart—the 3,300+ stocks not included in the Russell 3000 represent just 3% of the total market cap.

The reason we like to look at the Russell 2000 is that it represents a class of riskier stocks that are still, for the most part, viable companies.

Once you get into the “others,” as labeled on the charts, you’re basically just looking at lottery tickets.

The Russell 2000 fits into a middle ground … Viable companies with a lot of room to grow.

The index gives us a gauge of how risky the market feels.

Often when the Russell 2000 is performing well we say the market is “risk on” and when it performs poorly you can assume the market is “risk off.”

A few household names included in the index are:

  • BJ’s Wholesale Club (BJ)
  • Avis Budget Group (CAR)
  • Macy’s (M)
  • Revlon (REV)

For tracking use tickers RUT or IWM.

Conclusion

The big three indexes are the Dow, Nasdaq, and S&P 500. Include the Russell 2000 and you’ve got the big four.

Each tells a different story and represents a different segment of the stock market.

Just don’t let the number fool you. The big number that tracks the Dow is only tracking 23% of the global market cap.

The S&P 500 has the smallest number of the big three but represents the largest market cap.

To stay up to date with all the different indexes sign for our free daily 1-minute market brief by clicking here.

Disclosures:

This post was written in June 2022 with the best available information. The numbers are representative of the general market conditions but not an absolute measure. 

The charts were created by Trading For Keeps and may be reused so long as credit is given to Trading for Keeps and this post is linked to.

Companies mentioned may be removed from indexes by the respective organizations that maintain the indexes.

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