Stock market indexes are calculated from collections of individual company stocks that are selected by firms that compile indexes to represent the performance of a particular stock market (e.g., overseas stocks or U.S. large company stocks). A base value is initially established for an index, and changes in the index are compared to previous index values as an indicator of market trends.
The best known index, because it is widely reported each trading day, is the Dow Jones Industrial Average, also known as "the Dow," which consists of 30 U.S. stocks. The Dow is a price-weighted average, which means that share price changes have the same effect on the Dow regardless of percentage changes based on the share prices of individual stocks.
Another widely quoted index is the Standard & Poor's (S&P) 500, which tracks 500 U.S. stocks. The S&P 500 (along with most other major market indexes) is a market capitalization (cap) weighted index, which means that the size of the companies contained within the index influence the index numbers. Changes in the value of larger companies will affect the S&P 500 more than changes in the value of smaller ones.
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