Candlestick Trading Blog

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And the Survey Says...
Anyone past their teens remembers the television game show “Family Feud”. There would be a survey and 100 people would give their answer for each question that was asked. The teams on the show would then have to guess their answers in order to win. That survey is a sampling of thoughts. In the stock market, if you wanted to do the same thing you would take a look at the market indexes known as the Dow Jones Industrial Average, the S&P 500 or the NASDAQ Composite. These market indexes represent the performance of a portion of the market and their numbers give traders an indication of whether the direction of their market is going up or down.

The actual numbers reflected by these market indexes is not as important as the percentage of change over time. Added to this percentage is the direction and together the two will tell you if the market is changing, and if that change is for the good or bad. When used with other measurements, the market indexes can help successful traders form opinions about whether to make buys or sells.

Here are some of the most common market indexes and the markets they track:

• The Dow Jones Industrial Average – This is the granddaddy of them all. The Dow is the oldest, most widely known and most quoted of all the market indexes by those who are investing in the stock market. The Dow tracks 30 of the most influential companies in the US and because of this small sample, it misses out on the small and mid-size companies completely. It is a price weighted market index which means that if a stock price changes by $1, the effect on the market index is the same no matter the price of the stock. The Dow reflects about 25% of the total market and its changes reflect consumer confidence in stocks.



• S&P 500 – This market index is most commonly used by professionals playing the stock market as a snapshot of the market. It includes 500 of the most widely traded stocks and because it is a market cap weighted index, changes in larger companies tend to reflect more strongly than smaller companies. The S&P 500 tends to be a more accurate indicator than the Dow.



• The NASDAQ Stock Market Composite – Although this market index includes all of the stocks on the NASDAQ market (more than 5,000), it is historically weighted toward technology stock sectors. This is because it is a market cap weighted index and the technology companies strongly influence this index.



• Others – There are a number of other market indexes and each has a different focus. Mutual fund investors can find a number of funds that track almost any index they want. In spite of the different market indexes, the “Big 3” best serve the needs of most investors who are analyzing stock market indexes.