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🔮 Past, Present & Future

Abby Hadidian
Abby Hadidian

Happy Thursday everyone! For all the readers on the East Coast, I hope you’re enjoying the first snowfall of the season.❄️

If you are looking for something interesting to listen to while you shelter indoors, check out John's recent interview with Shelley Tang where they talk all things IPO.

Today we are diving into part two of our series on Indexes. Today we’re going to give a brief history of the index, some big players in the game right now, and finally, what this all might mean for you.

📰 In the Headlines

The business news stories we are watching & how you can follow along

🔨 Breaking Up Big Tech

The USA, UK, and EU are all taking big steps in reducing the power and increasing oversight into the biggest tech companies.

🌿 Big Growth Energy

Big things are happening in the industry known for its rather inactive customers.

🕰 In Good Time

In Tuesdays newsletter, we went over some of the basics of what stock indexes are and what they’re used for. I highly recommend you read that over before diving in below.

When trying to learn a new concept or idea, I like to start with understanding where it comes from or why it was made in the first place.

💥 The First Stock Index

On 3 July 1884, Charles Dow created the world's first stock index, the Dow Jones Transportation Index. This index was made up of 11 transportation stocks, and was calculated by adding the price of all the shares, and dividing them by the number of stocks.   A few years later, they created the Dow Jones Industrial Average, which is still one of the most widely followed indexes to this day.

He and Edward Jones published the index in their ‘Customer's Afternoon Letter’, which was one of the first publications of financial news and stock prices. A few years later, that newsletter was renamed to The Wall Street Journal.

Since then, many other publications and financial institutions have relied on indexes to monitor the performance of industries, commodities, and markets.

It is now estimated that there are over 2.96 million indices worldwide.  Don’t worry though, you don’t need to know them all.

📃 Indexes You Want To Know:

Dow Jones Industrial Average: (aka DJIA or ‘The Dow’) Known as the grandfather of indexes, there are now 30 big-name large-cap US companies in the Dow Jones, operating in a wide variety of industries. However, many people criticize the popularity of the Dow because it contains such a small sample size of US companies.

The S&P 500: (aka Standard & Poor's 500 Index or simply "the market,") The S&P 500 is the most commonly used benchmark for the large-cap segment of the US stock market. The index represents approximately 500 US-based companies and is commonly referred to as just ‘the market’ because it covers about 80% of all equity traded in the US.

The NASDAQ CompositeThe NASDAQ Composite Index consists of the over 2,500 stocks from the NASDAQ, the first fully-electronic stock exchange. The index is composed mostly of tech stocks, along with a few health care, consumer goods, and financial service companies as well. The Nasdaq Composite Index is often reported in the news because it, (a) is such a broad-based market index and, (b) is being calculated constantly throughout the day.

The Wilshire 5000 Index: (aka "the total stock market index,")  The Wilshire 5000 is the broadest stock market index, containing the 3,451 companies US based companies that are publicly traded on the US stock exchange. It is probably the most widely-cited broad based market index.

The Russell 2000: This index consists of about two thousand publicly traded companies with the smallest market cap. It tracks the performance of smaller companies in the U.S. and is often used as a benchmark for the performance of small-cap stocks in the United States.

The MSCI Indexes: An acronym for Morgan Stanley Capital Investments, these are several indexes that show the performance of foreign investments. The most commonly referenced indexes are the All Country World Index, Europe Australasia and Far East Index, and MSCI World

Bloomberg Barclays US Aggregate Bond Index: The BBUABI is a bond index covering most U.S. traded bonds and some foreign bonds traded in the U.S.  Investors can monitor this index to track the performance of the overall bond market. There are also total bond market index funds based on this index that allow investors to capture the entire bond market.

Final Thoughts

In the past few decades, there has been a huge change in the way we use indexes. While they were first created to monitor the performance of a market or industry, they are now being used to create new investing opportunities with Index/Mutual Funds or ETFs.  The Wall Street Journal and Bloomberg have both written about what they call “The Great Index Fund Takeover”. Before investing in an Index fund or ETF for yourself, read more about the consequences of relying on Funds and ETFs alone.


Word of the Day

Market Cap Weighted

(adj.) An index measuring method that considers the market value of each stock. A company’s representation within the index is based on its market cap, and its performance contributes to the performance of the overall index proportionately. This way price changes for companies with larger market caps are not undervalued.

NewsletterFinance 101

Abby Hadidian

Newsletter writer for Four Minute Finance | Econ Nerd & Pun Enthusiast