Major Stock Indices – Dow, FTSE, etc.

As investors build a portfolio, they are more likely to be interested in what is going on in the financial world. This new found curiosity is quite natural; piqued of course by the financial stake now held that rests upon the shoulders of the financial market. For most long-term investors, the best advice might be to simply ignore the financial news for the most part. Of course, you would want to keep up with substantial changes within any company in which you own stock, but the day-to-day ebb and flow of the stock market can drive one nearly insane. If you happen to be the type who becomes anxious every time the stock market has a bad day or even a bad week or month, then you should seriously reconsider your risk tolerance and perhaps adjust your portfolio accordingly. However, for others, following the market becomes somewhat of a hobby or a general interest. If that is the case then it would be good to understand what the major stock indices are and how they work.

UK and US Stock Indices

Perhaps the most well-known stock index worldwide is the Dow Jones Industrial Average (DJIA), also just called the Dow Jones, the Industrial Average or even just the Dow. It is not necessarily the most important or even the best index to follow, but in regards to financial news it is very commonly referenced. The Dow Jones consists of 30 of the largest companies in the United States, including IBM, Johnson & Johnson, Boeing, Caterpillar, ExxonMobil, Bank of America and others. It was first developed in 1896 (and has changed many times since then) to give a snapshot of American industry across a wide range of sectors in order to measure the overall health of the US stock market. The idea is that as these companies go, so goes the market.

The Dow uses a price-weighted calculation to achieve the average, meaning that stocks with a higher price will weigh more heavily on the Dow, while low-priced stocks will have less influence. Given that there are only 30 stocks are included on the index, many experts believe the Dow Jones is not a very accurate representation of the US market as a whole. However, as stated, it is still one of the most commonly referenced indices and is important to investors around the world.

UK’s FTSE Indices

In the UK, the FTSE 100 is the major index, usually referred to as the FTSE (pronounced, footsie). Consisting of 100 of the largest companies in the UK, the FTSE is much newer than the Dow Jones, having been created in 1984. However, it too gives an overall measure of the financial markets across a wide range of industries. The FTSE includes UK companies such as BP, Vodafone, Prudential, GlaxoSmithKline, HSBC, Royal Dutch Shell, Lloyds Banking Group, Rolls-Royce Group and many other well-known corporations.

The FTSE 100 is actually only one of many FTSE indices, although it is the most referenced index in the UK, thus commonly just called the FTSE. Other FTSE indices include the FTSE 250, FTSE 350, FTSE UK Dividend+, the FTSE SmallCap and the FTSE All-Share index. Each of the other indices has a specific market or industry segment that they measure.

While the FTSE 100 measures the top 100 companies in the UK in terms of market capitalisation, the FTSE 250 measures numbers 101 through 350. Both the FTSE 100 and 250 may change up to four times per year when companies switch between the top 100 companies and the next 250. The FTSE 350 is simply a combination of the two. The FTSE 250 and 350 are not very commonly followed but it is still important to know what they represent.

The FTSE All-Share index is one of the best measures of the overall UK stock market, as it measures nearly 99% of UK market capitalisation. That does not necessarily mean it measures 99% of the stocks listed on the London Stock Exchange. Instead, by market capitalisation, the FTSE All-Share index represents nearly 99% of the monetary value of the shares listed. In other words, it is a very broad index and a very good measure of the overall health of the UK financial markets.

Wilshire 5000

In the US, a similar index would be the Wilshire 5000 Total Market Index, or simply, the Wilshire 5000. Its purpose is to measure all of the stocks actively traded in the United States. It is not commonly followed by investors but is often looked to as a measure of the overall economic health of the US market.

S&P 500

A much more commonly referenced broad index in the United States is the S&P 500. It includes 500 of the largest corporations in America and although the Dow Jones may be more well-known, the S&P is seen as the benchmark for the US stock market. Many investors compare their returns to those of the S&P 500 and even mutual funds, ETFs and other large investment companies see the results of the S&P 500 index as the goal for returns during any given time period.

NASDAQ Composite

The other important US index is the NASDAQ Composite, which measures all of the stocks and many other securities traded on the NASDAQ Exchange. Although the NASDAQ is based in New York City, it includes some international stocks, giving it a broader reach than just the United States. A majority of the companies listed on the NASDAQ are considered to be tech based and growth companies as opposed to older, blue-chip type companies. Therefore, the NASDAQ Composite can be a very good indicator of the worldwide technology sector.

Investing in a Stock Index

It would be impossible for most investors to build a portfolio to follow any given index exactly, since some contain thousands of different companies while others use complicated formulas for finding the average. Fortunately, however, it is quite possible to own a portfolio very similar to many of the different indices.

There are several different mutual funds that aim to mimic the movements of a given index. Although the easiest way to accomplish the feat is through an exchange traded fund (ETF). One of the more popular funds following the FTSE is the iShares FTSE 100 (symbol: ISF). Its purpose is to replicate movements of the FTSE 100 index as closely as possible. iShares also offers an S&P 500 ETF (symbol: IUSA), which does the same for the S&P 500 index.

However, the most popular ETF representing the S&P 500, and one of the most actively traded index ETFs overall, is the SPDR S&P 500 ETF with the symbol SPY. It trades over the New York Stock Exchange and follows the movements of the S&P 500 very closely. Another very heavily traded index ETF is the PowerShares QQQ. It is also called the Cubes or Qubes because its original symbol was QQQQ. It is sometimes known simply as the Qs. The Cubes measures the NASDAQ Composite’s 100 largest non-financial stocks and is very technology sector heavy.

Yes, many argue that ideally, we as investors would not pay much attention to the financial news on a daily basis. Though others point out that it would be almost foolish to actually never pay attention to the markets in which we invest. The key is to take each bit of news and each surge or pullback shown on a stock market index as a small blip on our financial radar. In fact, many wise investors see pullbacks or dips in the indices as great opportunities to buy quality stocks at discount prices. For this reason alone, watching and tracking the market indices is a worthwhile hobby after all.