Index Funds Define Your Stock Market Index
By TheStreet.com Ratings Staff

The following is an excerpt from TheStreet.com Ratings' Ultimate Guided Tour of Stock Investing:

The S&P 500 is often referred to as "the market." But it's important for you to remember that it may not be the right index to compare your stock against, if the stock you're comparing doesn't have similar characteristics to those 500 companies. Pick the index that reflects the characteristics of the stocks you are interested in buying.


The S&P 500 Index. If you're interested in buying stock from a "large-cap" company, meaning companies with the most money circulating in the stock market ($5 billion or more), this is the index you compare it to.

This index, the most widely known, and widely regarded, benchmark of the U.S. equities market, compares the performance of a representative sample of 500 "large-cap" companies in leading industries of the U.S. economy. The S&P 500 is maintained by the S&P Index Committee, whose members include economists and analysts. The committee rates stocks based on their size, their liquidity, or availability of assets, their rank in their industry, and how diversified they are. The S&P 500 is frequently used as the standard of comparison in determining a stock's investment performance.

The DJIA, or Dow Jones Industrial Average. If you want to buy a "blue-chip" stock, which are stocks known for their ability to make money and pay dividends to shareholders, then this is the index to compare it to.

This index measures 30 "blue-chip" stocks, which get their fancy name from the companies they represent. These are large, creditworthy companies traded in the U.S. that are famous for their quality and the wide acceptance of their products and services. By studying these companies, many believe one can get a good picture of how the market as a whole is performing.

This index, prepared and published by Dow Jones & Co., is one of the oldest market indicators. The companies within the Dow are widely held by individuals and institutional investors. The Dow's 30 stocks represent about a fifth of the $8 trillion-plus market value of all U.S. stocks, and about a quarter of the value of stocks listed on the New York Stock Exchange. Although there are now dozens of alternatives, the Dow is still the index financial professionals instinctively check first to see how "the market" is doing. It has a wide following among investors and is well known by even those who have yet to invest in equities.

NASDAQ Composite Index. If you're looking for an index that contains companies whose common characteristic is size, or "market capitalization," measured according to the total dollar value of all outstanding shares, check out this index.

The NASDAQ Composite Index looks at the market capitalization of both domestic and international stocks. Because it is so broad-based and evaluates more companies (over 4,000) than most other stock market indices, the NASDAQ is also widely followed and quoted among the major market indices.

Russell 3000® Index. If you're looking at a stock from a new and growing company, this is the index to compare it to.

The Russell 3000 Index, which represents 98% of the U.S. market, provides a barometer of the broad market and is revised annually to include new and growing equities.

Russell 2000 Index. If you're looking at stock from a "small-cap" company (a company with less than $1 billion in the stock market), this is the index to compare it to.

The Russell 2000 Index, which includes the smallest 2000 securities in the Russell 3000, offers investors access to "small-cap" companies. Like the Russell 3000, this index is also revised annually to include this part of the market.

The Dow Jones Wilshire 5000 Index. This index, the largest of the indices, measures the performance of nearly all U.S. companies. This means you could compare any stock to this index, especially those that don't have any of the characteristics of the above indices.

Market Index Characteristics
Index # of Companies Average Size Comment
S&P 500 500 Large-cap Widely known index
DJIA 30 Large-cap Includes "blue-chip" stocks from large, creditworthy companies
NASDAQ 4,000+ Various Broad-based, includes domestic and international
Russell 3000 3000 Various New and growing companies
Russell 2000 2000 Small-cap Includes the smallest 2000 securities in the Russell 3000
DJ Wilshire 5000 5000 All Largest and broadest of U.S. stocks




Learn More
 Index Funds
 Understand the Risks of Index Funds
 Define Your Stock Market Index

Related Stories
Ask TheStreet: Index Intro
By  Gregg Greenberg
The Dow Jones Industrial Average, S&P 500 and Nasdaq provide different measures of the market.

Ask TheStreet: ETFs vs. Index Mutual Funds
By  Jen Ryan
Here are the major differences between the popular investment vehicles.

StreetSmarts: What's an ETF?Go to Video
By Farnoosh Torabi
Farnoosh Torabi pounds the pavement to find out.

Learn the ABCs of ETFs
By  Gregg Greenberg
Exchange-traded funds may sound complicated, but the pros and cons are pretty straightforward.

Why ETFs Could Be Good for Your TradingGo to Video
By Brittany Umar
Brittany Umar details some of the main investor benefits of ETFs.

ETFs: Understand the RisksGo to Video
By Brittany Umar
Brittany Umar tells you how to determine if your exchange-traded funds are cutting it.

Ask TheStreet: So Many ETFs
By  Jen Ryan
A little research can go a long way toward choosing a fund that's best for you.

Five Steps to Picking a Fund
By  Gregg Greenberg
Here's how to measure performance, keep an eye on costs and make sure your portfolio isn't overcrowded.

The A to Z of Dissecting a Fund Prospectus
By  Jonas Elmerraji
Need to learn how to read a mutual fund or ETF prospectus? Here's your go-to guide.

iShares CEO on Which ETFs Thrive in a Volatile MarketGo to Video
By Lee Kranefuss
Lee Kranefuss, CEO of iShares, discusses trends in the ETF industry and names the ETFs that are thriving in the volatile market environment. Krenefuss says ETFs have "tracked their indices... and done what people wanted, which was provide market access during all sorts of times."

Who Will Win ETF WarGo to Video
By Matt Hougan
Matt Hougan, editor of IndexUniverse.com, offers his opinion on who will win the rapidly escalating war between ETF providers.


Related Subscription Services
TheStreet.com ETF Shark Alerts
By James "Rev Shark" De Porre
Our ETF pro emails you about his short- and long-term trades -- before he makes them.