Around the world there are many different stock market indexes, as new investor it is important to know what these indexes actually track. In some countries there are even multiple indexes, like in the United States. The Golden Investor recommends starters to first start investing in exchange traded funds (ETF’s) that track these indexes, these ETF’s provide good diversification at an affordable level.
The United States
In The United States there are several important and famous indexes, all working in a different way. The most important aspect of indexes is that they change over time as stocks listed on the exchange must comply to several criteria.
The Dow Jones Industrial Average (DJIA)
The Dow Jones Industrial Average (DJIA), more commonly known as the Dow Jones is a stock market index that measures the stock performance of thirty companies with a high market capitalization listed on stock exchanges in the United States. While the Dow Jones was initially created to track heavy industrial companies, nowadays it is more broadly diversified as the U.S. economy has changed in composition. The thirty companies listed on the index often have a market capitalization that exceeds 100 billion U.S. dollars, therefore, the companies listed on this index typically do not grow fast. However, companies listed on the Dow Jones typically offer steady index growth and dividends.
Standard & Poor’s 500 (S&P 500)
The S&P 500 tracks the five hundred largest publicly traded companies in the United States. However, it should be noted that the 50 largest companies in the index are weighted more heavily in the index than the other smaller companies. This distortion in weight causes the index to not accurately describe the overall state of the economy. The name Standard & Poor’s come from the publishing firm Standard & Poor’s that created this index.
The Nasdaq is known as a stock market index, however, it is also a stock exchange just like the New York Stock Exchange (NYSE). The Nasdaq is more focused on technology and growing companies compared to the NYSE. The NYSE American (AMEX) is another exchange that is designed for growing companies.
The Nasdaq Stock Market Index, or the NASDAQ-100, lists the hundred largest companies on the exchange. However, you may also have heard of the NASDAQ Composite, which is the index that tracks all the companies listed on the Nasdaq Stock Exchange. There are over three thousand companies listed on the exchange, which makes it the second largest stock market exchange in the world.
Russell 3000 Index
The Russell 3000 Index tracks the three thousand largest publicly traded companies in the United States that are most actively traded. It incorporates about 98 percent of the value of the entire American equity market. Therefore, it is a far better tracker of the state of the U.S. economy than the S&P-500.
Russell 2000 Index
The Russell 2000 Index tracks the two thousand smallest companies in the Russell 3000 Index. This represents only about seven percent of the total market capitalization of the Russell 3000 Index. It is known as a good tracker of small cap firm on the equity markets in the United States.
In Europe there are two large stock market exchanges, The London Stock Exchange (LSE) and the EURONEXT which listing three thousand and fifteen hundred companies respectively. Although fairly smaller than their American counterparts, these stock exchanges offer great diversification possibilities. It should be noted that one of the reason that European stock exchanges are relatively smaller is due to the European system in which financing is more done through private banking loans rather than public offering of stock.
The Cotation Assistee en Continu, or the continuous assisted trading index, is the benchmark index for the French stock market. The CAC-40 tracks the forty largest companies listed on the French trench of the Euronext.
The Financial Times Stock Exchange (FTSE) 100 Index tracks the one hundred largest companies by market capitalization listed on the London Stock Exchange. However, as much of the companies listed on this index trade overseas, it is not an accurate representation of the economy of the United Kingdom.
The Deutscher Aktienindex, or the German stock index, can be seen as the German doppelganger of the Dow Jones Index, as it consists of the thirty largest German companies listed on the Frankfurt Stock Exchange. Just like the Dow Jones, the DAX is relatively industry-heavy just like the overall German economy. However, just like the other indexes, it should not be seen as an accurate tracker of the German economy.
The FTSE MIB, which stands for Milano Italian Borsa, tracks the performance of the forty largest companies listed on the Borsa Italiana, the Italian stock exchange. A special feature of this index is that the amount of funds listed on the index may vary over time, unlike many other stock indexes. It represents around eighty percent of the total stock market value on the Borsa Italiana.
The Amsterdam Exchange Index is the most important Dutch stock market index. With its twenty five funds it is one of the smaller indexes in this list. However, just like the Dutch economy, the index is services-heavy which makes it a good diversifying index next to industry-heavy indexes like the Dow Jones and the DAX.