A Guide On How to Read Stock Indices and Securities
Lets Break down the definitions behind the Key indexes and securities
Each morning when you turn on your screens you will likely see the same financial performance numbers over and over. The problem is there isn’t a good explanation of what they all mean to give you a way to better interpret what might matter for you.
In our Dinner Table Discussions newsletter, we highlight the main indicators that would be helpful to know (you can find more detail in our Market Rundowns in our Current Events section here) —the S&P, Nasdaq, and Dow Jones indexes, the 10-year Treasury note, and Bitcoin. We will also highlight one additional financial commodity or security that's catching attention.
If you aren’t sure how to read them, fear not! That’s why we created this guide to help.
Let’s get to it.
S&P 500
What it is: The S&P 500, short for the Standard & Poor's 500, is an index comprising 500 of the largest publicly traded companies in the United States. These companies span various sectors and are chosen based on their market size, liquidity (i.e. how much of their stock is traded per day), and other factors.
How it works: The index is market capitalization-weighted which is another way of saying it’s weighted by company value (a stock’s market capitalization is all shares multiplied by the stock price); companies with higher market capitalizations exert greater influence on the index's performance. Its value is calculated by the aggregate market value of the 500 companies.
Why it matters: The index is considered a benchmark for the overall U.S. stock market, the S&P 500 reflects the performance of large-cap stocks, providing insights into the country's economic health and investor sentiment.
Dow
What it is: The Dow Jones Industrial Average, known as the Dow, is a collection of 30 blue-chip stocks representing major U.S. companies across various industries.
How it works: Unlike other indices, the Dow is price-weighted, where higher-priced stocks have a more substantial impact on the index's value (as opposed to market capitalization or total company value). This index's movements are often associated with broader market trends.
Why it matters: As one of the oldest and most recognizable stock indexes, the Dow offers a snapshot of the market's performance, albeit with a limited number of constituents.
Nasdaq
What it is: The Nasdaq Composite is an index encompassing over 2,500 stocks tracking securities listed on the Nasdaq stock exchange. Typically most people think of technology stocks when they think of the Nasdaq as they tend to make up a lot of companies on the exhange although all sorts of companies are listed.
How it works: Unlike the Dow, the Nasdaq uses market capitalization as its weighting method (similar to the S&P 500). For that reason this index is heavily influenced by large tech giants like Apple, Amazon, and Google.
Why it matters: Being the go-to for tech-heavy stocks, the Nasdaq showcases trends in the technology sector, often indicating market sentiment towards innovation and growth.
10-Year Treasury
What it is: The 10-year Treasury note is a debt security issued by the U.S. government, offering a fixed interest rate and maturing in ten years.
How it works: Investors buy these Treasury notes, and their yields fluctuate based on demand and economic conditions. The 10-year yield often serves as a barometer for broader interest rates and market confidence.
Why it matters: Widely regarded as a safe-haven investment, fluctuations in the 10-year Treasury yield signal shifts in investor sentiment and economic outlook. Watching this rate go up and down and also be a good proxy to see where mortgage rates are headed.
Bitcoin
What it is: Bitcoin is a decentralized digital currency that operates on a blockchain network, free from central authority control. It’s price fluctuates freely bases on supply and demand factors.
How it works: It's created through a process called mining and is stored digitally in a transparent, secure ledger known as the blockchain. Bitcoin's value is subject to market demand and supply dynamics.
Why it matters: As the pioneer of cryptocurrencies, Bitcoin potentially challenges traditional financial systems, offering an alternative investment avenue. Its volatility and technological innovation make it a compelling asset for some investors. It’s price will also tend to do well along with other speculative assets and have more volatility than some of the indexes talked to above.
Expect to see the five indicators above in most measures of markets. And you also may see discussion on any number of the following worth paying attention to. These include…
Individual stocks
What it is: A stock is a little sliver or “share” of a company that you can purchase and own. They usually take the form of “common” shares (which have voting rights that can influence some corporate decisions) or “preferred” shares (which don’t have voting rights, but do offer a bit more protection than common shares in the event of a bankruptcy and also may offer an edge when it comes to receiving dividends, or quarterly payments made to shareholders).
How it works: Companies sell shares on a stock exchange through an initial public offering (we talk more about IPOs here); companies can also sell extra batches of stock to raise even more money later on although this can have negative consequences. In the market, share prices usually fluctuate based on supply and demand.
Why it matters: Stocks can move with the broader market, but specific company events (new product, earnings, management change) can also affect how investors see a company’s future growth potential, thus sending prices up or down.
We’ll occasionally highlight individual stocks if they have broader implications for the consumer or your wallet and explain what happened to cause a large move.
Volatility Index (VIX)
What it is: The CBOE Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX). Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and because of the the VIX is often called “the fear guage” by Wall Street.
How it works: The VIX attempts to measure the magnitude of price movements of the S&P 500 (i.e., its volatility). It does this by looking at options (options are instruments that allow you to bet on the future of an underlying asset) and how quickly some of these prices are changing.
Why it matters: VIX is now an established and globally recognized gauge of U.S. equity market volatility and can give you a sense of what investors are thinking. A higher reading would imply more volatility and potential fear and a low reading would indicate calm (more on the VIX here).
Oil (WTI)
What it is: The North American crude oil benchmark, known as West Texas Intermediate (WTI), is one of three main oil benchmarks used around the globe. While WTI is sourced primarily from Texas, it's considered one of the highest-quality oils and is often refined into gasoline.
How it works: WTI is the physical commodity behind oil futures contracts traded on the New York Mercantile Exchange. Oil futures = financial instruments that allow investors to buy "abstract oil." When the futures contract expires, that investment is converted into IRL oil, cashed out, or rolled into a future futures contract.
Why it matters: Oil prices are affected by economic conditions, good ol' supply and demand, and geopolitical forces. Watching oil prices can also loosely give you an idea of what is going to happen next at the gas pump.
Gold
What it is: Gold has been known for thousands of years as a valuable commodity. When investors talk about gold prices today, they're most likely referring to the price per ounce of gold bullion.
How it works: Gold is priced in U.S. dollars around the world. Investors can buy physical gold in the form of bullion or coins or go for more intangible gold securities, such as futures, ETF shares, or investments in gold mining companies.
Why it matters: In a 21st century economy where currencies aren't pegged to the gold standard and credit cards are the medium of exchange, some investors argue gold is a relic. But others turn to the metal for diversification or as a "safe-haven asset"—something to buy during times of geopolitical or economic uncertainty because it holds onto its value. A significant move in the value of gold can oftentimes tell you a lot about the economy and where your other investments may be headed.
Sign up for our newsletter below and get the latest financial news that matters to your family
