Tracking Investment Markets with Indexes
Indexes, which measure and report changes in the value of a selected group of securities, give investors an instant snapshot of how well the market is doing. Through them, you can quickly compare the performance of your portfolio with the rest of the market.
Dow Jones Industrial Average
The oldest and most famous stock market index is the Dow Jones Industrial Average (DJIA, or simply the Dow). It is the index most frequently quoted when someone asks how the market is doing. The Dow tracks a basket of 30 of the largest and most influential public companies in the stock market.
Serious investors are better served by looking at broad-based indexes, such as the S&P 500 and the Wilshire 5000, and industry or sector indexes, which better gauge the growth of specific industries and sectors.
Standard & Poor’s 500
The Standard & Poor’s 500 (S&P 500) tracks the 500 largest (measured by market value) publicly traded companies. Because it contains 500 companies, the S&P is more representative of the overall market’s performance than the Dow. Money managers and financial advisors watch the S&P 500 more closely than the Dow. Mutual funds especially like to measure their performance against the S&P 500.
QQQ (or Qubes) is the index that tracks NASDAQ-100: the top 100 stocks traded on the NASDAQ exchange. This index is for investors who want to concentrate on the largest companies, which tend to be especially weighted in technology issues. QQQ is a favorite index among day-traders.
The Russell 3000 index includes the 3,000 largest publicly traded companies (nearly 98 percent of publicly traded stocks). The Russell 3000 is important because it includes many mid-cap and small-cap stocks. Most companies covered in the Russell 3000 have an average market value of a billion dollars or less.
Dow Jones Wilshire 5000
The Wilshire 5000, or the Wilshire Total Market Index, is probably the largest stock index in the world. It began in 1974 tracking 5,000 stocks and has ballooned to cover over 7,500 stocks. The advantage of the Wilshire 5000 is that it covers nearly the entire market. It includes all the stocks on the major stock exchanges (NYSE, AMEX, and the largest issues on NASDAQ), which by default also include all the stocks covered by the S&P 500.
Morgan Stanley Capital International
With indexes of all kinds, Morgan Stanley Capital International (MSCI), although not quite a household name, has been gaining ground as the indexer of choice for many exchange-traded fund (ETF) providers. MSCI indexes are the backbone of domestic and international Vanguard ETFs, as well as Barclays iShares individual country ETFs.
The world is a vast marketplace that interacts with and exerts tremendous influence on individual national economies and markets. Regardless of the size of your investments, keep tabs on how your portfolio is affected by world markets. The best way to get a snapshot of international markets is with indexes. Some of the more widely followed international indexes are the Nikkei (Japan) the FTSE 100 (Great Britain), the CAC 40 (France), and the DAX (Germany).