FINANCE: Reading the indices with insight

I am taking a one-month hiatus from my column as I get adjusted to fatherhood with the newest addition to our family, Talia Marie. I have asked a capable co-worker to cover for me this month.

–Anthony Thorpe

With the performance of the financial markets in recent years, almost all investors keep close tabs on the major indices. Below is a list of the six market indicators most closely followed by investors, and some information that may help you understand them.

Dow Jones Industrial Average Index

The DJIA is a price-weighted average (highest-priced stocks have the most influence) of 30 blue-chip stocks that are generally industry leaders and are listed on the New York Stock Exchange. The DJIA has been a widely followed indicator of the stock market since October 1, 1928.

The components of the DJIA, which change from time to time, represent between 15 percent and 20 percent of the market value of NYSE stocks. When analysts and investors speak in general about movements in “the market” they are usually referring to the DJIA. The DJIA is quoted in points, not dollars.

Standard & Poor’s 500 Index

S & P 500 is a European-style, capitalization-weighted index (shares outstanding multiplied by stock price) of 500 stocks that are traded on the New York Stock Exchange, American Stock Exchange and Nasdaq National Market. Specifically the S & P 500 is based on the prices of 400 industrial, 20 transportation, 40 financial and 40 public-utility stocks.

The advantage of a capitalization-weighted index is that each company’s influence on index performance is directly proportional to its relative market value. It is this characteristic that makes the S & P 500, which was developed on a base value of 10 for the 1941-43 base period, such a valuable tool for measuring the performance of actual portfolios. Note: Of the 2,682 general U.S. stock funds tracked by Lipper Analytical Services, only 130 beat the S & P 500 in the first half of this year.

National Association of Securities Dealers Automated Quotations System Composite Index

The Nasdaq Composite is a broad-based capitalization-weighted index of all Nasdaq National Market and Small-Cap stocks, over 5,000 corporations altogether. The largest component of the Nasdaq Composite, over 38 percent, consists of technology-driven corporations such as Intel, Microsoft, 3Com, and Cisco Systems. Because it is so broad-based, it is one of the most widely-followed and quoted major market indices.

New York Stock Exchange Composite Index

The NYSE Composite is an index based on the prices of all common stocks listed on the exchange. Like the S & P 500, it is a capitalization-weighted index. It was established on Dec. 31, 1965 with a base value of 50 by the NYSE to provide a comprehensive measure of the market trend for the benefit of investors concerned with general stock market price movements.

American Stock Exchange Composite Index

AMEX Composite is a capitalization-weighted, price-appreciation index that replaced the AMEX Market Value Index (XAM) which had been calculated on a total-return basis. The AMEX Composite was established with a base of 550 on December 29, 1995 and was introduced on January 2, 1997. The new AMEX Composite Index is now more comparable with the other major indices.

Russell 2000 Index

This is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 11 percent of the Russell 3000 total market capitalization. The Russell 2000 and the Russell 3000 are part of a group of indices that are put out by the Frank Russell Company. Each year, the Russell indices are re-balanced to more accurately reflect the state of the market; this makes them the only collection of equity-style indices in the market that are comprehensive and constructed solely by objective criteria.

Alicia R. Wells is a marketing specialist with Roney & Co., member NYSE, SIPC.