Common Stock Market Indexes

You've heard of the Dow and the NASDAQ—referring to the Dow Jones Industrial Average and NASDAQ Composite Index, respectively. Every day on the radio, TV, or news Websites, you hear the numbers rattled off. These two indexes are perhaps the most well-known to most Americans. But they are by no means the only ones, and neither are they the most comprehensive measures of the stock market. Standard and Poor's, the Russell Investment Group, and Morgan Stanley created indexes that have become the benchmarks for millions of investors, both individual and institutional.

The S&P 500 is the most notable index maintained by Standard & Poor's, a financial services company that publishes research on stocks and bonds. Its S&P 500 Index tracks 500 large-cap corporations, including a few foreign companies, that trade on both the New York Stock Exchange and the NASDAQ.

Created in 1957, the S&P 500 is widely used as a bellwether for the state of the US economy. After the Dow, it is the most widely used index of large-cap American companies. It is also the only stock index included in the Index of Leading Indicators, a measurement used to estimate future US economic activity. As well, many index mutual funds seeking to match the stock market choose the stocks of the S&P 500.

The S&P 500 is also frequently used in stock and mutual fund performance charts. These charts compare the index to the particular stocks or mutual funds, thus providing a sense of how they compare to "the market."

There are 26 different Russell indexes of the US common stock market, representing close to $4 trillion in assets. These indexes measure five different categories: the broad market, large-cap stocks, mid-cap stocks, small-cap stocks, and microcap stocks. Below are some of the most commonly watched indexes in the Russell family:

• Russell 3000 Index. The Russell 3000 Index measures the performance of the 3,000 largest American companies. Together, these companies represent about 98% of the equity market. Once each year, the index is reconstituted to reflect changes in the equity market. The Russell 3000 is further subdivided into numerous sub-indexes.
• Russell 3000 Growth Index. As a growth index, the Russell 3000 Growth Index measures the performance of 3,000 growth stocks. It chooses companies with high price-to-book ratios and high long-term growth forecasts. The stocks in this index are also included in either the Russell 1000 Growth or Russell 2000 Growth indexes.
• Russell 1000 Growth Index. The Russell 1000 Growth Index is a barometer of the large-cap growth market in the United States. It is adjusted once a year to adjust for changes in rank and outstanding shares. As a growth index, it focuses on companies with high long-term growth forecasts. Such companies frequently have high price-to-earnings and price-to-book-value ratios.
• Russell 1000 Value Index. The Russell 1000 Value Index measures the large-cap value market for US stocks. As a value index, this Russell 1000 focuses on companies with low price-to-earnings and price-to-book ratios and which are considered relatively underpriced, in view of their long-term value.
• Russell 2000 Growth Index. The Russell 2000 Growth Index is a barometer of the small-cap growth market for US stocks. As a growth index it focuses on companies with high long-term growth forecasts. Such companies frequently have high price-to-earnings and price-to-book-value ratios.
• Russell 2000 Value Index. The Russell 2000 Value Index measures the universe of small-cap American value stocks. It focuses on companies with low price-to-earnings and price-to-book ratios and which are considered relatively underpriced, in view of their long-term value.

More information about the Russell indexes and their performance data can be found at http://www.russell.com/Indexes/.

Sometimes called the "S&P 500 of foreign stocks," the Morgan Stanley Capital International, Inc. Europe, Australasia Far East (MSCI EAFE) Index is the most recognized benchmark of the foreign (non-US and non-Canadian) equity market in developed nations. It tracks over 1,100 securities from the following 21 countries: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The MSCI EAFE Index was created in 1969 and is weighted by market capitalization.

The EAFE is heavily watched not only by investors in foreign stocks, but also by investors in foreign mutual funds. Mutual fund investors seeking index funds that track the EAFE have a number of available options open to them.