BOSTON — Stock and bond indexes - such as the well-known Dow Jones Industrial Average - are instant snapshots of US and global commerce.
Take a quick peek at the "who's who" within an index and you can quickly learn about the very nature of the US economy.
For example, when picking companies for the Dow, the editors of The Wall Street Journal select firms that they consider "representative" of market trends or certain sectors.
When the Dow began back in 1896, most companies were smokestack-oriented. Today's Dow, by contrast, includes such nonindustrial firms as McDonald's, Walt Disney, and WalMart. Only one company has lasted from then to now: General Electric.
Yet the Dow remains essentially unchanged from year to year. The last major alteration occurred in March 1997, says Dow spokeswoman Heather Bell. Out the door went Bethlehem Steel, Texaco, Westinghouse, and Woolworth. In came Hewlett-Packard, Johnson & Johnson, Travelers, and WalMart. (Travelers is now listed as Citigroup.)
The Dow is price-weighted. The index rises or falls based on the share prices of its 30 companies. The Standard & Poor's 500 Index, by contrast, is weighted by market capitalization, a formula based on price times number of shares outstanding.
Two lessor known, but extremely important indexes, are the Russell 2000, which measures small-cap stocks, and the Wilshire 5000 index, which measures the entire US stock market. Nasdaq indexes track high-tech firms such as Microsoft, along with smaller, over-the-counter, companies.
Although these indexes are different, they all tend to move in the same direction. The goal of an index investor is to do at least as well as an index. Critics call that approach a cop-out to mediocrity. Indexers call it prudent investing.
To learn more about index funds, check out www.indexfunds.com on the Internet.
(c) Copyright 1999. The Christian Science Publishing Society