Q: I was watching television, and the anchor was talking about the Dow Jones Industrial Average and the S&P 500. What's the difference?
A: In order to get an accurate reading on the market at any particular point in time, there are five indexes you can follow, including two of the most followed — the Dow Jones Industrial Average and the Standard & Poor's 500, also known commonly as the S&P 500. You can keep tabs on their various performances in your daily paper, on the Web, and on financial channels like CNBC, and get at least an inkling of what's going on in the market — and in your own portfolio.
The Dow Jones Industrial Average is the oldest index, and one of the two that most people think of when they consider the market. But it's surprisingly arbitrary and subjective, only following thirty stocks. Critics also say that the Dow's results are skewed because each stock's weight is based on its stock price rather than the company's market value. Nevertheless, the Dow remains a sentimental favorite. So many people follow the Dow that even if it's readings aren't accurate, they still affect how people behave, and thus how they invest.
The Standard & Poor's 500 (or S&P 500) is an index of 500 large cap stocks accounting for about 80 percent of the U.S. market. That means it's a bit more telling than the Dow, but it still has its shortcomings. The index's 40 largest stocks constitute a significant portion of the S&P's market value.
The NASDAQ Composite Index, which measures the market value of all stocks listed on the NASDAQ exchange, was the darling of the late 1990s. As the home of many super-hot tech stocks and IPOs (initial public offerings — when a company's stock becomes available to the public), the NASDAQ's performance is a good proxy for how the tech sector is faring.
You won't hear the Russell 2000 mentioned that often on radio updates, but it's the best available benchmark for how small-cap stocks (those of companies with a market value of around $1.2 billion or less) are faring. If you look at the Russell in conjunction with the S&P 500, you've got a set of pretty good benchmarks for the entire market.
Finally, there's the Wilshire 5000, which reflects the lion's share of publicly traded stocks in the United States and provides almost a wide-angle shot of the market landscape. As a broader index than the S&P 500, the Wilshire can be a better tool.
Jean Chatzky’s Bottom Line
This week: Don’t skimp on investment research
Without question, one of the biggest mistakes investors make over and over again is diving into a stock or mutual fund without doing enough research.
What sort of research? It's very important to know whether the fund you're looking at has a load — otherwise known as a sales charge — as well as what analysts are saying about a company whose stock you're thinking of buying, and what the outlook is from management. Of course, sometimes no amount of research can save you from a bad investment. But most of the time, doing your homework — spending time with Morningstar reports (www.morningstar.com) for funds or Value Line for stocks — really pays.
Why would an investor make a mistake like this? Your past investment successes may be leading you astray. If you've done well picking stocks in the past, for example, you may believe you're very good at it — when, in fact, you've just been lucky.
Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Her latest book, "Pay It Down: From Debt to Wealth on $10 a Day," is now in bookstores. Copyright ©2005. For more information, go to her Web site, .