US stock indices can be defined as a set of benchmarks or analytical tools that represent the performance of a group of stocks. The index value is calculated in several ways. Some US indices are market-capitalization-weighted, meaning they give greater weight to companies with higher market capitalizations. Others are price-weighted, meaning they give greater weight to the stocks of companies with higher market prices. Trading indices provides exposure to a broader range of stocks and sectors than investing in a single stock or sector; thus reducing the negative impact of poor performance by a single stock or sector.
Indexes provide measures of various aspects of the US economy, such as the health of the US economy, market trends, sector performance, and investor sentiment. The Standard & Poor’s 500 Index represents the performance of the 500 largest publicly traded companies across all sectors, while the Dow Jones Industrial Average measures the performance of large-cap companies.
While the NASDAQ Index measures the performance of companies listed on the NASDAQ Stock Exchange, the majority of which are in the technology sector, index movements are affected by many factors, such as economic data, company financial results, and changes in index components.
Standard & Poor’s (S&P 500) Index
The Standard & Poor’s 500 (S&P 500) Index was introduced in 1957 as a stock market index tracking the performance of 500 companies listed on the New York Stock Exchange and the NASDAQ. It is a market-capitalization-weighted index, meaning it tracks the largest publicly traded companies with the largest market capitalization.
The S&P 500 Index includes a group of the largest and best-known companies, including Apple, Nvidia (NVDA), Meta (META), Microsoft (MSFT), and Alphabet (GOOGL). Companies are added and removed from the index periodically to reflect changes in the stock market, based on specific criteria, the most important of which is the companies’ market value.
The S&P 500 stock index is considered one of the most important global financial indicators, as it is considered a measure of the strength of the American economy. Because it represents 80% of the total market value of the companies listed on it, the S&P 500 reached a new all-time high on October 17, 2024, at 5,864.67 points, marking 47 new all-time highs this year at the time of writing.
Dow Jones Industrial Average (DJIA)
The Dow Jones Industrial Average (DJIA) was created in 1896 by Charles Dow and his partner, Edward Jones, and the index bears their name. The index initially included 12 companies, primarily from the industrial sector, and by 1928, it had grown to 30, which is why it is sometimes referred to as the “Dow 30 Index.” The index tracks 30 leading companies with stable earnings in the U.S. market, all of which are also included in the S&P 500 Index.
The Dow 30 is a price-weighted index, meaning it gives greater weight to companies with higher stock prices. Companies are removed from the index when they become less important to economic trends or when their market value declines. The latest company to be added to the index is Amazon, replacing Walgreens Boots Alliance (WBA). The Dow Jones Industrial Average hit a new record high on October 18, 2024, reaching 34,729.91 points, boosted by technology profits.
NASDAQ Composite Index
The NASDAQ Composite Index was launched in 1971 with a value of 100 points. It is also a market capitalization-weighted index of over 3,000 companies listed on the NASDAQ Stock Exchange. It is one of the most important indicators of the U.S. stock market and includes common stocks, American Depositary Receipts (ADRs), and real estate investment trust (REIT) units, while excluding preferred stocks.
Technology stocks make up the largest weighting in the Nasdaq Composite Index. The largest companies in the index include Apple, Microsoft, Amazon, and Nvidia. The index reached an all-time high on October 25, 2024, driven by profits from technology companies.
Russell 2000 Index
The Russell 2000 Index was launched in 1984 by Frank Russell. It tracks the performance of 2,000 small-cap U.S. companies, all of which are included in the Russell 3000 Index. The Russell 2000 is considered the broadest indicator of the U.S. economy, as it measures 96% of the stock performance of publicly traded companies. Industries make up the largest weighting in the index.
The largest companies included in the Russell 2000 Index are Super Micro Computer (SMCI) and MicroStrategy (MSTR). The index reached an all-time high of 2,438.4 on November 8, 2021, and has not set any new records this year, unlike other indices that track large companies. At the time of writing, it remains 11.8% away from its all-time highs.
How to invest in US stock indices?
US indices, and indices in general, cannot be invested in directly, as they are standard instruments and not securities in their own right. Investing in them is therefore done indirectly, through US index funds or exchange-traded funds (ETFs) that track the performance of indices.