What is a stock index? S&P 500, Dow and Nasdaq

What is a stock index?#

A stock index is a number that tracks how a defined group of stocks performs over time. The SEC describes a market index as a measure of the performance of a basket of securities that is meant to represent a sector of a stock market, or of an economy ^[1].

Each index has a rulebook, published by the company that runs it, which says which stocks get in, how much each one counts and how the level is calculated. The S&P 500 and the Dow Jones Industrial Average are run by S&P Dow Jones Indices ^[2] [3]; the Nasdaq Composite is run by Nasdaq ^[4]. The SEC names the S&P 500, the Russell 2000 and the Wilshire 5000 Total Market Index as examples of market indexes ^[1].

How do the S&P 500, the Dow and the Nasdaq Composite differ?#

The three headline U.S. indexes answer different questions. The S&P 500 is the large-company benchmark: its provider describes it as including 500 leading companies and covering approximately 80% of available market capitalization ^[3]. To be added, a company needs an unadjusted market cap of US$22.7 billion or more under the July 2026 methodology, a range the provider reviews at the start of each quarter ^[5]. Meeting that size alone does not guarantee a place.

The Dow Jones Industrial Average is much smaller. Its launch and base date is May 26, 1896, and it holds 30 stocks drawn from the S&P 500, leaving out transportation and utilities stocks ^[2]. An Averages Committee of three S&P DJI and two Wall Street Journal representatives maintains it ^[2]. There is no formula for joining: S&P DJI says stock selection is not governed by quantitative rules, and a stock is typically added only if the company has an excellent reputation, sustained growth and wide investor interest ^[2].

The Nasdaq Composite is defined by listing, not by size. It includes all domestic and international common-type stocks listed on the Nasdaq Stock Market ^[4], so it measures stocks listed on one exchange, not the whole U.S. market.

The main differences between the three indexes are summarised below.

Sources: S&P 500 ^[3] [5]; Dow ^[2]; Nasdaq Composite ^[4].

How are stocks weighted inside an index?#

Weighting decides how much each stock counts. There are three common methods.

Market-cap weighting. Each company counts in proportion to its market value. The SEC explains that in a market-cap-weighted index, securities with a higher market capitalization account for a greater share of the overall value of the index ^[1]. The S&P 500 goes one step further and uses float-adjusted market cap ^[5], which counts only shares available to investors rather than all shares outstanding ^[6]. See market cap explained if the term is new.

Price weighting. Only the share price matters. In S&P DJI's words, in a price-weighted index such as the Dow Jones Industrial Average, constituent weights are determined solely by the prices of the constituent stocks ^[7]. Company size plays no part.

Equal weighting. Every stock gets the same weight, so a fund tracking the index puts an equal dollar amount in each ^[7].

Why can the same stock move each index by a different amount?#

Because the weight multiplies the move. Suppose Company A from the example rises 10%, from $300 to $330, and nothing else changes. In the price-weighted version, total share prices go from $370 to $400, so the index rises 8.11%. In the cap-weighted version, total market cap goes from $840 billion to $870 billion, so the index rises 3.57%. Equal-weighted, it rises 3.33%. Every figure here is calculated; you can check percentage moves with our percentage change calculator.

This is why, in a price-weighted index like the Dow, one high-priced stock can move the level more than a much larger company ^[7]. In a cap-weighted index the reverse holds: the companies with the highest market value count most ^[1].

How is the index level calculated?#

An index level is a sum divided by a number called the divisor. For a cap-weighted index, S&P DJI writes the formula as Index Level = (∑ Pi × Qi) / Divisor, where P is each stock's price and Q its share count after adjustments such as float ^[7]. The Dow uses the same divisor method with prices alone ^[2].

The divisor is what keeps the level meaningful over time. Its job is to maintain the continuity of the index level after corporate actions, rebalancing or other changes that are not caused by the market ^[7]. Without it, swapping one company for another, or a stock split in a price-weighted index, would make the level jump even though no investor gained or lost anything.

1. Add up the inputs

   Price times adjusted share count for each stock in a cap-weighted index, or just the share prices in a price-weighted one.

2. Divide by the divisor

   The result is the index level you see quoted, a number in points rather than dollars.

3. Adjust the divisor when the basket changes

   When a company joins or leaves, or a corporate action changes share counts, the provider changes the divisor so the level does not jump for that reason alone.

4. Read the change, not the level

   The level on its own is arbitrary. What matters is the percentage change between two dates.

What can an index tell you, and what can it not?#

An index is a good summary of how a defined group of stocks did over a period. It is a useful yardstick: if you own a fund of large U.S. companies, the S&P 500 is a natural comparison. Indexes are also how sectors are tracked; the GICS system used by S&P DJI sorts companies into 11 sectors such as Information Technology and Health Care ^[8].

An index cannot tell you whether any single stock in it is a good investment, and a rising index says nothing about next year. The stocks inside it carry ordinary market risk, and so does any fund that tracks it ^[1]. In a cap-weighted index the largest companies count most ^[1], so the index can rise while many of its smaller members fall. For the label often given to large, established companies, see blue-chip stocks in the glossary.

Mistakes beginners make with stock indexes#

• Comparing point moves across indexes

  A 300-point Dow move and a 30-point S&P 500 move are not comparable. Each index has its own divisor, so compare percentage changes.

• Treating the Dow as the whole market

  It holds 30 stocks, and its universe leaves out the GICS transportation group and the utilities sector ^[2].

• Assuming a high-priced stock is a big company

  In the Dow, a $300 stock counts more than a $50 stock even if the cheaper company is far larger. Price weighting ignores size ^[7].

• Thinking you own the index

  You can only own a fund that tracks it, and that fund may lag the index because of fees, trading costs and tracking error ^[1].

Frequently asked questions#

The bottom line#

A stock index is a rulebook turned into a number. Before you read anything into a move, check which stocks the index holds and how it weights them: the S&P 500 and Nasdaq Composite by market value, the Dow by share price. Compare indexes by percentage change, never by points, and remember that an index tells you where a group of stocks has been, not where any one of them is going. Every investment, including a fund that tracks an index, can lose money.

Education only. This page is not investment, tax or legal advice. Stocks can lose value. See our risk disclosure.