Many people may hear market quotes wherever they get their news. Even media outlets that are not finance-focused often give stock market updates. With multiple terms for talking about the stock market, it can get tough to keep up with what exactly is being said. Some of the terms used to quote stock markets may be an index, an exchange, or both. Some of the most often used terms are the Dow, the S&P 500, and the Nasdaq.
A stock index is simply a list of companies, all of which meet some sort of criteria for inclusion on the list. While the Dow and the S&P 500 are indexes, the Nasdaq is both an exchange and an index. An exchange is a marketplace for selling and buying stocks. Along with the New York Stock Exchange (NYSE), the Nasdaq is one of two large US exchanges. The Nasdaq and the NYSE each have over 2,000 stocks listed on their exchanges. Though the Nasdaq and the NYSE function as marketplaces, the list of stocks that trade on their platforms can also be referred to as an index.
When market commentators refer to the price movements of the Nasdaq, they are talking about the combined total of all stocks that trade on the Nasdaq exchange. If enough stocks on the Nasdaq fall in price, the overall index will fall, and vice versa for upward moves. Because there are so many stocks on the Nasdaq, it is often used as a broad measure of the stock market. Compared to the thousands of stocks on the Nasdaq, the S&P 500 represents a smaller segment of the total US stock market. However, stocks included in the S&P 500 come from both the Nasdaq and NYSE exchanges.
As the Nasdaq contains a high percentage of technology-based companies, the S&P 500 can represent a broader view of the different sectors of the US market. In fact, the S&P 500 is typically used as a default term for the stock market. If someone talks about the stock market without specifying a certain index, they usually mean the S&P 500. Lastly, though the Dow Jones Industrials might be one of the most commonly cited stock indexes, it only contains 30 companies. Because it only has a handful of stocks, even though they are very large companies, the Dow may not be as good a gauge of overall markets as other indexes.
May 18, 2022
Markets Demystified is published the first and third Wednesdays of each month,
and explores how stock market investing can relate to personal finance.
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