How do you read the stock market?


Quick Answer

Investors interpret the stock market using three major stock indexes: the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite Index, according to About Money. The Dow indicates investor confidence, the S&P 500 gives a broad market measure, and the Nasdaq Composite reveals technology stock trends.

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Full Answer

A stock index represents a change from its base value, explains About Money. The important part of the index is its percentage of change over time. Indexes consist of a basket of stocks chosen because they are considered to represent a broader section of the market. For example, the Dow consists of just 30 stocks, but because these 30 are the stocks of giant corporations that total 25 percent of the market's value, the Dow is a strong indicator of investor sentiment. Many consider the weakness of the Dow to be that it does not include any small- or medium-sized companies. The S&P 500 represents 70 percent of the stock market's value and is considered by many financial professionals to be a stronger indicator of investor sentiment than the Dow. The S&P 500 is weighted. In a weighted index, the movement of a large company's stock is given more weight than the movement of a smaller company's stock. The Nasdaq Composite contains over 5,000 stocks and is also weighted. The large number of small technology companies' stocks included in the composite makes it an indicator for technology equities performance.

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