Tom Discusses Various Stock Indexes
Transcript:
Easan Arulanantham:
What’s the difference between like the Dow Jones, s&p 500, the NASDAQ, there’s all these like different, I guess, indexes.
Tom Vaughan:
Yeah, they mean, yeah. So what they are is baskets of stocks. So the S&P 500 is a basket of 500 stocks. S&P stands for Standard and Poor’s – that’s a company, they choose those 500 stocks, they have a screening methodology that they use that companies have to meet at least a minimum. And then they choose those 500 stocks. And so Tesla just got added to the S&P 500. So it was a big deal, for example.
And then the Dow right, that’s the oldest one, I think that goes back to 1883. But it’s only 30 stocks, mainly because back in 1883 30, stocks was a lot of stocks, obviously. Now, you know, there’s a lot more stocks out there than there was back then. And, and so that, again, is chosen, and those companies kind of come and go, but it’s a basket of 30 stocks in the NASDAQ is 1000 stocks, that’s the broadest of the three big indexes. And they all have a little bit differences.
So for example, the Dow tends to be more of kind of these older companies to a certain degree, kind of more of these value stocks. The NASDAQ tends to be more tech oriented. As far as that goes, because a lot of tech companies list on the NASDAQ, and then the, you know, the S&P is kind of a mixture of those. But one of the other key differentials is that how they weight them. So the S&P is weighted based on the size of the company, the what’s called the market cap. So the number of shares times the price is what’s called the market cap. And so bigger companies, you know, have more impact, NASDAQ has that same thing, its market cap weighted, so you’ll see really, you know, what they call the Fang stocks, you know, Facebook, and Amazon and Google and etc., or alphabet really, anyway, are, are all, you know, dominant on those two indexes, whereas the Dow is actually this goes way back, but it’s based on the price.
It’s weighted based on the price, which is a very strange way, nobody really does that anymore. But though, those are the differences between them, but essentially, they’re just baskets of stocks, and they’re meant to kind of represent what’s happening, you know, in total, in my opinion, you really got to look at a lot more indexes to really see what’s happening, because they’re just so many stocks out there, and I’m just talking about the US.
So I would include the Russell 2000 in that group of things that I might watch, that’s 2000, small-ish cap stocks, and you might have a better idea if you watch all four of those have kind of what’s happening. Because you know, day by day, things can be quite different with, you know, one index doing better than another took, you know, to get a better idea. You need to see some more of the broad based, you know, indexes that are out there.