S&P 500 index is one of the most widely used indices after DOW Jones index for following large cap companies. This index is maintained by Standard and Poor’s which is a division of McGraw Hill. The ticker symbol for the S&P 500 index varies. Some examples of the symbol are ^GSPC, .INX, and $SPX.

There are various index funds and exchange traded funds (ETFs) which are based on S&P 500 index. Some of these funds are:

Vanguard 500 Index Fund (VFINX)

Fidelity Spartan US Equity Index Fund Advantage (FUSVX)

E*TRADE S&P 500 Index Fund (ETSPX)

Columbia Large Cap Index Fund (NINDX)

DWS Equity 500 Index Fund (BTIEX)

USAA S&P 500 Index Fund (USSPX)

Rydex S&P 500 A (RYSOX)

Rydex S&P 500 C (RYSYX)

The S&P 500 stock market index, maintained by Standard & Poor’s, comprises 500 large-cap American companies. S&P 500 is a core component of the U.S. indices that could be used as building blocks for portfolio construction. It is also the U.S. component of S&P Global 1200.

Index constituents exhibit the following characteristics:

• Market Coverage – Approximately 75% of the U.S. equities market
• Weighting – Market capitalization
• Market Capitalization – Minimum of US$ 3 billion
• Public Float – At least 50%
• Reconstitution – As needed basis

The companies which constitute this index are:

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3. Stock Market investing for beginners – What is a Stock Market Index?

However It seems that post was not enough for people to understand the Dow Jones index as beginners. That is why this post will help you understand Dow Jones in pure simple terms.

Let us begin at the very simple definition of a stock market index.

A stock market index is what is needed to help you track the market. In general it is a way to tell the broader market direction. The broader market will I turn tell the health of the economy.

Then somebody thought of this and took a group of securities and decide that their simple average of the prices will be like and index.

Then you compare yesterday’s index with today’s and say that the broader market was up or below the previous day index. Now if it was simple average then a company with huge price will be able to manipulate the index and hence they have weighted average so as to discount the theory that one company can potentially influence the stock market movement.

The Dow Jones industrial 30 companies are carefully selected and the index is calculated very carefully and here is the current list of the Dow Jones stock list and I have the Dow Jones industrial 30 companies symbols.

3m Co (MMM)

Alcoa Inc (AA)

American Express Company (AXP)

AT&T Inc (T)

Bank of America Corporation (BAC)

Boeing Co (BA)

Caterpillar Inc (CAT)

Chevron Corp (CVX)

Cisco Systems Inc (CSCO)

E.I. du Pont de Nemours and Company (DD)

Exxon Mobil Corp (XOM)

General Electric Company (GE)

Hewlett-Packard Co. (HPQ)

Intel Corporation (INTC)

International Business Machines (IBM)

Johnson & Johnson (JNJ)

JP Morgan & Chase & Co (AMJ)

Kraft Foods Inc (KFT)

McDonald’s Corporation (MCD)

Merck & Co., Inc. (MRK)           

Microsoft Corporation (MSFT)

Pfizer Inc (PFE)

The Coca-Cola Company (KO)   

The Home Depot, Inc.(HD)         

The Procter & Gamble Company (PG)

Travelers Companies Inc (TRV)

United Technologies Corporation (UTX)

Verizon Communications (VZ)

Wal-Mart Stores, Inc. (WMT)

Walt Disney Company (The) (Holding Company) (DIS)

So how does the Dow Jones work and how the Dow Jones is computed and measured.

The average price of the 30 stocks is taken and then divided by a divisor. It is this divisor which is calculated and adjusted based on the splits, mergers and the overall weight of each stock. If this divisor was 1 then assuming Dow Jones is a stock then the stock price is simply the average stock price of each stock. This weight for each is calculated by the price weightage method.

The Dow Jones closing history and the Dow Jones closing stock charts will tell us that the market has invariably gone through a lot of ups and downs and each time it has rebound and has given the amazing returns tom investors and in turn also giving out some good market gurus like Warren Buffet.

Then there are other set of industrial averages related to each industry which are tracked by a lot of people and these are collectively known as Dow Jones Industrials. This is important for understanding the stock market

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Of course you would have heard stories about the 1929 crash or the 1987 stock market crash and it being called the Black Monday. On that day the stock market index called the Dow Jones Index plummeted by 22.6% and shed 508 points.

What is Dow Jones Industrial Average and what does it mean for you stock market for beginners investor.Does the moment reflects a loss or a gain for you and how can you earn by tracking the movement of the index.

Another name for the Dow Jones Industrial Average is DJIA or Dow 30 or simply The Dow or Dow Jones. It was created by the Wall Street Journal editor and co-founder of the Dow Jones & Company Charles Dow.

DJIA consists of 30 stocks of the largest and most widley held public companies of the United States. This in mathematicla terms is price weighted average of the 30 stocks. To calculate this the sum of all the prices of the 30 stocks is divided by a divisor. This dow divisor is actually less than one and is adjusted for any stock splits or changes occurring to the underlying 30 stocks.

So you would argue that Dow Jones is really the average of the 30 stocks only and does not reflect the whole market. Yes, correct some would argue but on other side you have those 30 stocks across industries and as widely held as possible which are more likely to give an indication of the market moods and directions and also you can compare the average historically to gain more insights into the macro trends of the market.

Several other indexes are now popular since with the advent of technology and many other exchanges. A few notable indexes among them are

NASDAQ -100, S&P 500, Russell 300, FTSE30(for theLondon stock exchange,BSE 30(India – Bombay Stock Exchange) or the Hang Seng Index(Hong Kong stock Exchange).

As you learn the stock market for beginners basics, the movement of the index would give you some idea of how the health of the economy is and how the stock market is taking it. On the other hand it may sometimes mean that even though the stock market index is rising you particular stock may not be because of lot of other factors like the industry it is in, the management of the company and how that individual company is doing in terms of the market expectations.

In this age a lot of stock market traders rely on a combination of indices like a sector specific index as well as broader index like Dow Jones or S&P 500 to track the progress of the overall market as well as the sector in which their stock is.

So as a beginner you should for now keep track of the progress of the index to gauge the market sentiment but be aware of the industry,the management,the sector your stock is in to make money by trading in stocks.

Related posts:

1. Explaining the Dow Jones Index for beginners – what is DJIA
2. Understanding the Stock Market for beginners
3. Stock Market Terms – S&P 500 Index, S&P 500 index funds and S&P 500 companies