Top 3 U.S. Stock Market Indexes

Stock market indexes are indicators for global and country-specific economies. In the United States, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite are the three most followed indexes by the media and investors. An additional 5,000 indexes with varying categories cover the U.S. equity market.

What Indexes Tell Us

The U.S. market indexes include a range of methodologies and categorizations that serve investors and businesses. Indexes can be market-weighted or price-weighted. The movement of the top three indexes is regularly reported throughout the day on media platforms.

Investment managers use indexes as benchmarks for performance reporting. Investors use indexes to guide portfolio allocations. Indexes also form the basis for passive index investing completed through exchange-traded funds (ETFs).

1. The S&P 500

The Standard & Poor's 500 Index, commonly known as the S&P 500, is an index with 500 of the top companies in the U.S. Stocks chosen by market capitalization. The S&P 500 Index is market-weighted or capitalization-weighted. The constituent committee also considers other factors, including liquidity, public float, sector classification, financial viability, and trading history.

The S&P 500 Index represents approximately 80% of the total value of the U.S. stock market and provides a gauge of the whole U.S. market. When the total market value of all 500 companies in the S&P 500 drops by 10%, the value of the index also drops by 10%.

2. The Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA) includes the stocks of 30 of the largest and most influential companies in the United States.The index is known for listing the U.S. market's best blue-chip companies with regularly consistent dividends.

The DJIA is a price-weighted index, once computed by totaling the per-share price of the stock of each company in the index and dividing this sum by the number of companies. Stock splits, spin-offs, and other events have resulted in changes in the divisor. The DJIA represents about a quarter of the value of the U.S. stock market. Although the DJIA is not a snapshot of the broad market, it reflects the blue-chip, dividend-value market.

3. The Nasdaq Composite Index

Most investors recognize the Nasdaq as the exchange on which technology stocks are traded. The Nasdaq Composite Index is a market-capitalization-weighted index of all the stocks traded on the Nasdaq stock exchange and includes companies based outside the United States. This index covers several subsectors across the tech market, including software, biotech, and semiconductors.

Although the Nasdaq carries a large portion of technology stocks, it does include securities from the financial, industrial, insurance, and transportation sectors. The Nasdaq Composite includes large and small firms, but unlike the Dow and the S&P 500, it also holds many speculative companies with small market capitalizations. The movement of this index generally indicates the performance of the technology industry and investors' attitudes toward speculative stocks.

The Bottom Line

Indexes play an important part in the overall analysis of the U.S. equity market. Indexes and their movements provide insight into the economy, investor sentiment, and trends for investing diversification.