Market Indices
Benchmarks that track a basket of securities: the price-weighted Dow Jones Industrial Average (30 large companies), the market-cap-weighted S&P 500, the tech-heavy Nasdaq Composite, and the small-cap Russell 2000.
Expect the exam to hand you a feature and make you name the index: “only 30 stocks,” “price-weighted,” or “uses a divisor” all point to the DJIA, while “broadest measure of large-cap performance” or “the index professionals call the market” is the S&P 500. A favorite trap exploits the Dow divisor: stock splits and component substitutions shrink the divisor so the average stays continuous, which is why a $300 stock sways the Dow more than a $30 one regardless of company size. Don’t confuse an index (a measurement) with an index fund or ETF (a product built to replicate it).
Watch the crossover with economic indicators: S&P 500 stock prices are a leading indicator — one of the Conference Board’s ten LEI components — because prices anticipate the cycle, not coincident or lagging. Students also mix up the Nasdaq Composite (essentially every Nasdaq-listed stock, tech-heavy) with the narrower Nasdaq-100 (~100 largest non-financial names). Memory hook: “Dow = Dollars” (price-weighted), “S&P = Size” (cap-weighted).
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