Reading the Averages

Introduction to Stocks

Stock market activity is reported daily in averages and indexes designed to assist the state of the economy.

The change in price and the volume of sales of any single stock on any given day matters mostly to its shareholders. However, what the market does as a whole is a gauge of what's happening in the economy. That activity is reported in several different averages and indexes designed to measure trends in the market.

The Dow Jones Industrial Average (NYSE: DJI), also called the DJIA, Dow 30, or informally the Dow Jones or The Dow) is one of several stock market indices created by nineteenth century Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. Dow compiled the index as a way to gauge the performance of the industrial component of America's stock markets. It is the oldest continuing U.S. market index, aside from the Dow Jones Transportation Average, which Dow also created.

Today, the average consists of 30 of the largest and most widely held public companies in the United States. The average is price-weighted. To compensate for the effects of stock splits and other adjustments, it is currently a scaled average, not the actual average of the prices of its component stocks - the sum of the component prices is divided by a divisor, which changes whenever one of the component stocks has a stock split or stock dividend, to generate the value of the index. Since the divisor is currently less than one, the value of the index is higher than the sum of the component prices.

S&P 500 - The Standard & Poor's 500 is a market-value-weighted index (shares outstanding multiplied by stock price) of 500 stocks that are traded on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and the NASDAQ National Market System. The weightings make each company's influence on Index performance directly proportional to that company's market value. It is this characteristic that has made the Standard & Poor's 500 Index the investment industry's standard for measuring the performance of actual portfolios..

Companies selected for the Standard & Poor's 500 Index are not chosen because they are the largest companies in terms of market value, or sales, or profits. Rather, the companies included in the Index tend to be representative of important industries within the U.S. economy and many also are the leaders of their industries. When the U.S. Department of Commerce developed its Index of Leading Economic Indicators in 1968 to signal potential turning points in the national economy, it chose the S&P 500 Index as one of the components.

NASDAQ - The NASDAQ-100 Index includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies including investment companies. The NASDAQ-100 Index is calculated under a modified capitalization-weighted methodology.

History of Stock Market Indexes
Dow Jones Indices Website
MSN Money page for DJIA
Google Finance page for DJIA
Yahoo! Finance page for DJIA
Seeking Alpha coverage of the Dow ETF