General

Stock Market Indices

Adeyemi Adegbite Written by Adeyemi Adegbite · 1 min read >

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Background

In this session, I will be discussing the preview into our capstone project. We all were requested to identify two sectors on the stock exchange, not limited to the Nigerian stock exchange from which four companies will be selected. To add to its difficulty, we were asked not to select from FMCG (Fast Moving Consumer Goods), oil and gas, banking or agricultural sectors. Furthermore, the four companies must all have their fiscal year ending December 31st. At first, it seemed a daunting task to find “interesting” sectors with such varieties but sectors such as healthcare, airlines, information technology and consumer discretionary can to the party.

S&P 500

The first consideration was the Nigeria stock exchange, however, we struggled to find 10 years financial reports of most companies. This led us to other markets and chief among them was US stock exchanges. In order to filter through the companies and current performances we resulted to S&P500 index and Fortune 500 list. The S&P 500 also known as Standard and Poor’s 500 is a stock market index. This index help track stock (in effect the company) performance. As in the case of S&P 500, it tracks the performance of the top 500 large companies listed on the US stock exchanges. The 500 companies listed on S&P index necessarily does not equal the most capitalized companies rather a weighted capitalization is utilized. The market capitalization is weighted against the publicly available share. As at 2022 January, the 500+ companies on the S&P 500 accounted for over $42 trillion.

Dow Jones Industrial Average

Similar to the S&P index is the Dow Jones Industrial Average (simply referred to as Dow). The Dow is a stock market index that tracks the performance of the market using the price weighted measurement of the top 30 prominent companies listed on the stock exchange. The Dow is the second oldest index in the US market indices but most professionals consider it inadequate because of its scope. It is believed that is offers inadequate market representation by focusing only on 30 companies.

Russell 3000 & NASDAQ Composite

Another consideration was Russell 3000 index. The Russell 3000 Index is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S stock market. It measures the performance of the 3,000 largest publicly held companies incorporated in America as measured by total market capitalization, and represents approximately 97% of the American public equity market. The index was launched on January 1, 1984. Finally is the NASDAQ composite. The composition of the NASDAQ Composite is focuses mainly on companies in the information technology sector. The Nasdaq-100, precisely tracks performance of 100 of the largest non-financial companies in the US stock market and these 100 companies accounts for over 90% of the movement of the Nasdaq Composite. The Nasdaq Composite is a capitalization-weighted index; its price is calculated by taking the sum of the products of closing price and index share of all of the securities in the index. The sum is then divided by a divisor which reduces the order of magnitude of the result.

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