Investing in The US Stock Market: An Overview of The Top Indices

Investing in stocks is one of the excellent ways to generate wealth in both short and long terms. Here, diversification is the key strategy to achieve better returns.

While the Indian stock market can help you generate great returns, investing in the US share market can aid in diversifying your portfolio geographically. This way, you can easily hold shares of global leaders such as Google, Apple, Amazon, etc. However, before you venture into the US share market, understanding the US indices is key.

Understanding the functioning of a US stock index can help you assess market trends, and you can make informed financial decisions. To that end, continue reading to understand more about a few top-performing US indices and plan your investments smartly.

S&P 500

Though the United States has approximately 5,000 indices, this is one of the three most followed US indices. The other two indices are Nasdaq Composite and Dow Jones Industrial Average.

Also referred to as the Standard & Poor 500 Index, this consists of the top 500 US companies. This is one of the most commonly used US indices following the market-cap weighting method.

The index was established in the year 1957 and it applies the free-float weighted market-cap method to assess the index value. The maximum number of shares a company has in relation to the current market price of each share is what helps determine the market cap of a specific company.

Simply put, if the market value of the entire 500 companies reduces by 10%, the S&P 500 index value also decreases by 10%.

According to the S&P 500 index, a company having a larger market capitalisation is given a better weightage in comparison to a firm with a low market capitalisation. There is a specific committee that has been appointed to choose specific stocks depending on the following factors:

• Size
• Liquidity
• Industry type
• Trading history
• Financial viability
• Sector classification

If any company wants to qualify for this index, here are the following parameters to meet:

• The firm must have a base in the US
• The company's market capitalisation has to be at least $8.2 billion
• Around 50% of shares need to be available to the general public for trading purposes
• The company must have a share price of at least $1
• About 50% of the total fixed assets and corresponding revenue needs to be in the United States
• The company must show proof of positive earnings across four consecutive quarters in a financial year

With almost 500 companies, this US index covers approximately 80% of the US share market. As such, the robust composition of the index enables investors to get an accurate analysis of the entire performance of the stock market.

A few top-performing companies included in the S&P 500 are Apple, Microsoft, Berkshire Hathaway, Johnson & Johnson, etc.

Nasdaq Composite

When planning to trade technology stocks, this is one of the most popular US indices. This is a market-cap-weighted index of various stocks normally traded on the Nasdaq exchange. You may find certain companies listed here which may not have their base in the US.

As this index is primarily tech weighted, you may also find various sub sectors such as biotech, software, semiconductors and the like. While it is heavily populated with tech stocks, you may also find securities from other sectors as well.

You can find securities from other sectors such as insurance, industrials and transportation stocks, etc. Some common securities that form a part of this US index include:

• Tracking Stocks
• Common Stocks
• American Depository Receipts
• Limited Partnership Interest

However, note that the index does not include derivatives, ETFs, funds or debentures, unlike the S&P 500.

The Nasdaq Composite consists of both large and small companies with lower market capitalisations. In addition, this US index also includes speculative stocks. The performance criteria are dependent on the movement of the technology sector coupled with the behaviour patterns of investors toward purchasing more speculative stocks.

A few top-performing companies included in the Nasdaq Composite include Microsoft, Apple, Netflix and Facebook (Meta).

Dow Jones Industrial Average

This is yet another frequently used index among the top US indices. The index contains around 30 stocks of some of the most influential firms in the United States. Unlike the S&P 500 index, this is a price-weighted one, which represents approximately a quarter of the total value of the US share market.

Initially, this index was calculated by finding out the sum of the total share price of each company and then dividing the value by the total number of companies. However, this is no easy task to calculate using this method due to umpteen reasons, such as stock splits and spin-offs.

While it is used as a performance benchmark by some, the other few believe that this index cannot track the progress of the US share market efficiently. This is primarily because the Dow Jones Industrial Average takes into account only 30 companies.

A few top companies included in this index are Goldman Sachs, Walt Disney, Chevron, Intel, Nike, IBM and much more.

Before venturing into the US share market, remember that you cannot directly invest in the US index. Instead, you are allowed to invest in specific avenues tracking these US indices. Knowing this helps you generate reliable returns in your diversified portfolio.

Now that you are familiar with a few top-performing US indices make sure you analyse the avenues thoroughly you want to invest in from different perspectives. This helps you make sound financial decisions and secure potential returns.