Stockology

If you’ve ever cracked open the Business section of your local newspaper, or clicked on the Finance link on Yahoo!’s front page, or simply not been living in a cave for the last y years, you’ve undoubtedly heard of the Dow Jones. Dow Jones is the publisher of The Wall Street Journal and Barron’s (a weekly business journal). Yeah, it’s those things too. But that’s not the Dow Jones I’m talking about. I’m talking about the Dow Jones Industrial Average, or the Dow, for short.

The Dow is an index of 30 companies. Some smart people sat in a room and decided to create an index of 30 companies that would best reflect the United States. These 30 companies in the Dow are known as the Dow components. Like… the components that make up something… Anyway, the Dow components are usually big companies, big household name brands that you’ve heard of. You’ve got your Bank of America, Disney, McDonald’s, General Electric, Boeing, Verizon, Home Depot, etc. Usually when people say, “The market’s up 200 points today,” they’re refering to the Dow.

There are two other main indices that you’ll want to know: The S&P 500 and the Nasdaq Composite Index. I’ll save the Nasdaq for last because it’s more confusing.

The Standard & Poor 500, or S&P 500, is kind of like the Dow. But instead of tracking 30 companies, it’s an index that tracks 500 companies. A lot of the S&P 500 components are still companies you’ve probably heard of, like UPS, or Wells Fargo, E*Trade, eBay, Gap, etc. The two indices (the Dow and the S&P) overlap. The 30 Dow components are probably also components in the S&P. I haven’t confirmed this, and I’m not going to because I’m lazy. But just think about it. If you’re going to make a list of 30 really big companies, then make another list of 500 really big companies, some of those companies are going to be the same companies, right?

Before moving on to the rest of the indices, I’m going to talk about exchanges. Trust me, I’m not deliberately trying to confuse you. It’s just better to know these things in this order.

In the United States, there are no less than 10 stock exchanges, or bourses (a word I picked up from reading The Wall Street Journal and looked up on Dictionary.com). The good news is you don’t have to know all 10, just 3 of them. The bad news is, it’s confusing. So the 3 you should know: the New York Stock Exchange (NYSE), the National Association of Securities Dealers Automated Quotations (NASDAQ), and the American Stock Exchange (AMEX). The way exchanges work is this: When a company becomes public, it lists its shares on an exchange so that its shareholders can trade its stock.

The NYSE is the largest stock exchange in the world in terms of dollar volume. That means, more money exchanges hands on the NYSE than any other stock exchange. Then you have the Nasdaq, which is an electronic exchange. Most of the companies that trade on the Nasdaq are companies with smaller market capitalizations; smaller companies, if you will. That’s not to say there aren’t any big ones that trade on the Nasdaq. Microsoft, Intel, and Cisco are some of the biggest companies in the world that trade on the Nasdaq. It’s just that a lot of smaller companies, namely technology and biotechnology companies, tend to list on the Nasdaq rather than the NYSE.

I’m going to leave the AMEX out of this discussion because frankly, it’s not that important. 

Here’s where it gets confusing. We’ve established that the NYSE and the Nasdaq are exchanges. But they’re also indices! The NYSE Composite is an index that covers all the stocks listed on the NYSE. Likewise, the Nasdaq Composite tracks all stocks listed on the Nasdaq exchange. But wait! There’s more. There’s a Nasdaq-100 Index, which tracks the 100 largest domestic and foreign non-financial companies.

Is your head spinning yet? 

So while indices and exchanges are completely different things, there really is a fine line in distinguishing them when you hear them in the media. You’ll hear people say, ”The Nasdaq is up today,” in which case, they’re refering to the index. Or if you hear, “Apple was among the Nasdaq’s most active today,” they’re refering to the exchange that Apple is listed on. Conversely, you’ll probably never hear anyone say, “The NYSE was up today.” I don’t know why. It just doesn’t happen.