Understanding the U.S. Stock Market: Key Indices & Global Impact

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The U.S. holds the top spot as the world’s largest economy and its financial markets, by default, are the biggest and most liquid. U.S. equities have a total market value that dwarfs the market value of the rest of the world. When the U.S. share market index is measured with the MSCI All Country World index, it accounts for approximately 60% of the entire index. Consequently, U.S. stocks and the American markets cannot be ignored. Every day, the world’s financial markets watch the U.S. markets to determine the fate of stocks in the rest of the markets across the globe.

Understanding the U.S. Share Market

An integral part of the American economy, the U.S. stock market serves as an effective barometer of the financial strength of the American economy. Besides providing a place for investors and other key players to buy and sell American and international stock, the American markets with price fluctuations give a broader view of general economic conditions in the U.S. The U.S. market can be a challenge to navigate and a guide can help. However, you should know a bit of its history first.

The roots of the American stock market can be traced back to the 1700s. At the time, the Philadelphia Stock Exchange was established to trade in government securities. In 1792, the NYSE, or the New York Stock Exchange was created and this rapidly turned into the most important stock exchange in America. Over time, other exchanges like the Nasdaq Stock Market and the American Stock Exchange emerged. Now, the American markets give investors a broad range of investment options through all these exchanges.

The U.S. Share Market - Key Indices

If you are trading in the U.S. share market live, you need to know about stock indices. In any stock market, an index acts as a benchmark reflecting the overall performance of a set of stocks. As far as the U.S. financial markets are concerned, many main stock market indices are used by investors to monitor the performance of the American markets in general. The most well-recognised indices in the U.S. markets are:

  • S&P 500: The Standard & Poor’s 500 is a market-capitalisation weighted index comprising 500 large-capitalisation U.S. companies on its roster. These companies are from different sectors and the stocks of these are traded on the Nasdaq and NYSE. Many investors prefer the S&P 500 as a more representative sample of the stock market as it has 500 stocks compared with other indices like the Dow Jones Industrial Average which has just 30 “price-weighted” stocks. Moreover, as this is a market-capitalisation-focused index, it translates to being a better way to structure an index. The idea behind this is that market capitalisation offers a valuable gauge of fluctuating values of listed stocks rather than just the price. 
  • Dow Jones Industrial Average/DJIA: This index is a price-weighted index that comprises 30 blue-chip large-capitalisation companies arising out of a variety of sectors that are traded on the Nasdaq and NYSE. As a price-weighted index, the DJIA has only 30 stocks with the highest share price receiving the highest weightage.

The DJIA is the oldest index in the world, dating as early as the 19th century. It was formulated by Charles Dow. Due to its long history, the index is regularly cited as a general gauge of the U.S. share market today and the economy overall.

  • Russell 2000: This is an index that bases its stock component on market-capitalisation and comprises 2,000 small-capitalisation companies from an array of sectors traded on the Nasdaq and the NYSE.
  • Nasdaq Composite: With stocks based on market-capitalisation, the Nasdaq Composite is an index of stocks that are listed on the Nasdaq Stock Market, with a focus on growth-centric and technology companies. The Nasdaq is also an exchange in itself and has another index apart from the Nasdaq Composite. This other index is the Nasdaq 100. The Nasdaq Composite comprises over 3,000 stocks that are included on the Nasdaq stock exchange. Although you may find the Nasdaq Composite in the media and news quite often, for investment in ETFs, you may have to reflect on the Nasdaq 100.

The U.S. Share Market - Global Relevance

You can easily track the U.S. share market through its various indices but does the American stock market mirror the financial markets in a global sense? For the most part, some analysts insist that the U.S. stock market is a domestically driven market, as is so often reflected by S&P 500 stocks. This translates to the fact that the index's performance is typically the American economy's general strength. Nonetheless, in recent times, this phenomenon has undergone a change and recent trends have shown that the S&P 500 has attained a more international nature. In this sense, the index could be termed a global index.

As U.S. markets are gradually becoming reliant on foreign revenue sources, primarily for business growth and expansion, the U.S. stock market is evolving with international characteristics. What does this mean for U.S. stock indices? It means that they may essentially be moving in tandem with international equities.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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