We all have seen the media report a particular index breaking through record numbers. At the moment the focus is on the Dow Industrial average which is close to, but not able to break through the 20,000 number. Is that important to you? Should it be important to you? So which index should you look at as your barometer? Well that depends on your style or market goals. Today we will break each one of them down so you can be better prepared.
The Dow Jones Industrial average is by far the most popular index that gets reported on financial media channels as well as the standard news outlets. It is comprised of 31 stocks that are the best performing and largest companies (by market capitalization) out there. The problem is that it only represents a few, big stocks. For most it isn't an appropriate measure of the actual market performance. In addition, if one stock under performs they can switch it out with another, better performing name. Generally those that follow the Dow Industrial average are those that are passive investors with little to no participation in their portfolios.
The S&P 500 is known as the second most popular index. As the name states it is made up of 500 stocks. Now just by the sheer size of the index it can be assumed that it has a better sampling of the overall market performance. Those that follow the S&P 500 are more active traders, and industry professionals. The reason is simple. It is likely that they have, or manage portfolios that are made up of at least some of the names in the S&P 500. Also, with more names as a measurement professionals can more accurately gauge particular sectors of the market as well. If the top losers of the S&P 500 are mostly retail related then one can quickly assume that the retail sector is digesting some bad news or just having an off day.
Lastly we have the Nasdaq 100. This is typically used more by the day traders but also a secondary index for the professionals. It is made up of 100 tech stocks in particular. The day traders love to use this as a barometer of market performance simply because many of the fast, and active day trading stocks are part of the Nasdaq 100. Names like Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX), and Apple (NASDAQ: AAPL) to name a few. While these names are also members of the other indices it is highly likely that a day trader is looking at Nasdaq related names so this is their index.
Now this is just a guide but not something that is written in stone. There are many day traders that focus on Dow stocks and of course there are many fund managers that specialize in Nasdaq names. Its just a sampling of what index may benefit you the most for your particular style.