Every evening, many of us settle into an easy chair to watch the news. The anchor usually ends her or his report by telling us how Wall Street did today. Did you ever wonder what and where Wall Street is, and what is the difference between the Dow Jones Industrial Average, the Standard and Poor 500 Index and the NASDAQ Composite?
Wall Street is a street in lower Manhattan in New York City which houses many financial institutions including, the New York Stock Exchange (NYSE), investment banks, stockbrokers and traders. It was named Wall Street in the 17th century after the Dutch built an actual 12 foot high wall to protect the city from pirates and other invaders. The area around the wall became known as Wall Street. The Street runs the width of Manhattan from the East River to the Hudson River. The wall was dismantled in 1699, but the name Wall Street stuck. It is now recognized as the epicenter of the city’s Financial District.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange. It was named after its originators Charles Dow and Edward Jones in 1896. Companies like General Electric, the Walt Disney Company, Exxon Mobile, and Microsoft are now in the Dow. When people say the stock market is up today, they are probably talking about the Dow Jones Industrial Average.
The Standard and Poor (S&P) 500 Index is a larger index which measures the value of 500 companies, rather than the 30 in the Dow Jones. Companies that trade on the New York Stock Exchange or the NASDAQ are in the S&P 500. Institutional investors seem to prefer using the S&P 500 Index to make investment decisions because of its greater depth and breadth. Companies like 3M, Abbott Laboratories, Aetna Inc., and Apple Inc are represented in the S&P 500.
The NASDAQ Composite, launched in 1971, is an average of 100 stocks listed on the American Stock Exchange, also located in New York City. The American Stock Exchange is the second largest stock exchange in the world behind the New York Stock Exchange. Companies in the American Stock Exchange and represented in the NASDAQ Composite are often information and technology-oriented companies. Companies like Acadia Pharmaceuticals, Flowers.com, Erie Indemnity Company, and First Trust Nasdaq Retail are companies in the NASDAQ Composite.
The purpose of these averages, indexes and composites is to give investors a gauge to measure growth of the market. So, by knowing the value of an average today, you can tell if the average value went up or down from yesterday or a year ago. Remember the old adage, buy low and sell high? That’s how you can tell.
So, the next time your news anchor mentions how Wall Street is doing, you can think, “ I get it!”
Jeffrey Bellomo, Esq.