A single stock can rise while the whole market falls, or fall while the market rises. An index is how investors keep track of the whole market's trend without watching every stock individually.
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An index uses a specific set of stocks to measure price changes across a market, or a slice of one. It's a representative sample, an industry sector, a type of stock, a group of industries, standing in for the whole. Tracking how different indexes react to economic trends over time is one of the main ways investors try to make better-informed decisions.
Every index measures the market using stocks that meet its own selection criteria. The Dow Jones Industrial Average, "the Dow," is built from 30 large, well-known companies. The Standard & Poor's 500, the S&P 500, uses 500 large-cap companies instead.
Beyond large-cap, there are mid-cap and small-cap stocks. Large-cap companies, $10 billion and up in market cap, are usually less volatile than small-cap companies. Mid-cap sits between $2 billion and $10 billion. Small-cap, under $2 billion, tends to be the most volatile of the three.
Many investors watch percentage changes in the Dow or the S&P 500 as a proxy for "the market" overall. But an index generally can't track the ups and downs of any one particular stock, a stock can still rise even as the Dow or the S&P 500 falls, and vice versa. Matching the right index to the right stock matters: judging a large-cap company against the Russell 2000, a small-cap benchmark, wouldn't tell you much useful.
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Materials: Fact Sheet 1: Stock Index Chart · Activity Sheet 1: Identifying Indexes · Activity Sheet 2: Your Stocks and the S&P.
Four major indexes, each built with different rules for which stocks it includes and how much weight each one carries.
The best known and most widely followed market indicator in the world. It tracks 30 blue-chip U.S. stocks. Despite the name, it's not a simple average; it's price-weighted, so the gains and losses of its highest-priced stocks count more heavily than those of its lower-priced ones. Quoted in points, not dollars, the DJIA is the weighted total of its 30 stock prices divided by a divisor that's periodically adjusted for splits, spin-offs, and other changes. Its component companies change over time; in 1999, Microsoft, Intel, SBC Communications, and Home Depot were added and four others dropped, changes widely read as a signal of which companies, or company types, were gaining or losing weight in the broader economy.
Tracks 500 widely held large-cap stocks across the industrial, transportation, utility, and financial sectors. It's capitalization-weighted (also called market-value weighted), meaning stocks with the most outstanding shares at the highest prices carry the most influence, so a relatively small number of stocks can move the index. Which stocks are included, their relative weightings, and how many represent each sector are all subject to change at S&P's discretion.
Tracks every security traded on the NASDAQ Stock Market, making it a broader measure of activity than the Dow or the S&P 500 in one sense. In another sense it's narrower: because so many computer, biotechnology, and telecommunications companies list on NASDAQ, the index's movement is heavily influenced by those sectors specifically. It's market-cap weighted, so companies with higher market values exert more influence; a stock with 1 million shares that gains $3 moves the index more than a stock with only 500,000 shares gaining the same $3. It updates throughout the trading day.
Published by the Frank Russell Company of Tacoma, Washington, this index tracks 2,000 small American companies. It includes many recent IPOs and is generally treated as the benchmark index for small-cap investing. (Its stated average constituent market cap reflects the period this material was written; small-cap thresholds and the index's actual average market cap shift over time, so treat any specific dollar figure here as illustrative rather than current.)
The four indices trade at very different raw levels, the Dow sits in the tens of thousands of points while the Russell 2000 sits in the low thousands, so plotting their actual point values on one chart wouldn't show anything meaningful. The standard way to compare them side by side instead is to rebase each index to 100 at a common starting point, here, roughly year-end 2006, and then track growth from there. A line ending at 400 means that index has roughly quadrupled since 2006.
| Year | Dow | S&P 500 | NASDAQ Composite | Russell 2000 |
|---|---|---|---|---|
| 2006 | ~12,463 | ~1,418 | ~2,415 | ~787 |
| 2008 | ~8,776 | ~903 | ~1,577 | ~499 |
| 2010 | ~11,578 | ~1,258 | ~2,653 | ~784 |
| 2012 | ~13,104 | ~1,426 | ~3,020 | ~849 |
| 2014 | ~17,823 | ~2,059 | ~4,736 | ~1,205 |
| 2016 | ~19,763 | ~2,239 | ~5,383 | ~1,357 |
| 2018 | ~23,327 | ~2,507 | ~6,635 | ~1,349 |
| 2020 | ~30,606 | ~3,756 | ~12,888 | ~1,975 |
| 2022 | ~33,147 | ~3,840 | ~10,466 | ~1,761 |
| 2024 | ~42,544 | ~5,882 | ~19,311 | ~2,230 |
| 2026 (Aug) | ~54,037 | ~7,758 | ~26,691 | ~3,034 |
Colleges judge a high school student's overall performance using their Grade Point Average, a statistical average of every final grade across every course, which ranks a student against their class. A simplified scale:
| Letter | GPA Range | Percentage Average |
|---|---|---|
| A | 3.5 – 4.0 | 90 – 100 |
| B | 3.0 – 3.49 | 80 – 89 |
| C | 2.5 – 2.99 | 70 – 79 |
| D | 2.0 – 2.49 | 60 – 69 |
(This table cleans up an overlap in the original worksheet's ranges, where the A and B bands both included 3.5; the ranges above are the standard non-overlapping scale.)
An index works like a GPA for the market: it tells an investor the overall trend of a representative basket of stocks, and lets them compare their own holdings against whichever index best represents those holdings. Review the index characteristics in the Fact Sheet above, then work through these three scenarios.
If you use an index to judge the performance of an investment, picking the right index matters. Using the Dow or the S&P 500 to judge a company with a market cap of $500 million or less, for example, won't yield accurate results, that company belongs in small-cap territory, closer to the Russell 2000.
List five stocks currently in your team's portfolio and complete the table:
| Company | Ticker | Market Cap | Index | Rationale |
|---|---|---|---|---|
Use the four indexes from the Fact Sheet above, or another index that fits better. If you pick one not covered here, add a short write-up explaining it.
Track three stocks, selected from the five you listed in Activity Sheet 1, against the S&P 500 for a week. Record both price and percentage change each day.
| Day | Your Stocks | Your Stocks' Performance | S&P 500 Performance |
|---|---|---|---|
| 1 | Stock 1 | ||
| Stock 2 | |||
| Stock 3 | |||
| 2 | Stock 1 | ||
| Stock 2 | |||
| Stock 3 | |||
| 3 | Stock 1 | ||
| Stock 2 | |||
| Stock 3 | |||
| 4 | Stock 1 | ||
| Stock 2 | |||
| Stock 3 | |||
| 5 | Stock 1 | ||
| Stock 2 | |||
| Stock 3 |
At the end of the week, write a short essay describing the relationship between your individual stocks and the S&P 500's movement, and explain how you arrived at your conclusions.
Assessment: Complete Activity Sheet 1: Identifying Indexes, using the indexes from Fact Sheet 1 or a more appropriate one you identify and document yourself.
Application: Select three stocks from the five you listed in Activity Sheet 1. Track their daily performance against the S&P 500 for a week using Activity Sheet 2, then draw conclusions from what you find.
Enrichment: Research an index not covered on the Fact Sheet. How did it originate? What's its scope? What are its strengths and weaknesses as a market indicator? Then compare an appropriate company from your portfolio against other companies on that index, and explain the company's behavior relative to its sector's overall trend.