Although most people consider the Dow, Nasdaq, and Standard & Poor’s 500 to be the stars of the financial press, you may find other indexes equally important to follow because they cover other significant facets of the market, such as small-cap and mid-cap stocks.

You can check out other less-sexy indexes that cover specific sectors and industries. If you’re investing in an Internet stock, you should also check the Internet Stock Index to compare what your stock is doing when measured against the index. You can find indexes that cover industries such as transportation, brokerage firms, retailers, computer companies, and real estate firms. For a comprehensive list of indexes, go to www.djindexes.com (a Dow Jones & Co. Web site). The most reliable and most widely respected indexes are produced not only by Dow Jones but also Standard & Poor’s and the major exchanges/markets themselves such as the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and Nasdaq. There are also indexes issued or provided by smaller exchanges (such as the Philadelphia Exchange).

The Dow Jones Industrial Average

The most famous stock market barometer is my first example — the Dow Jones Industrial Average (DJIA). When someone asks how the market is doing, most investors quote the DJIA (simply referred to as “the Dow”). The Dow is price weighted and tracks a basket of 30 of the largest and most influential public companies in the stock market. The following list shows the current roster of 30 stocks tracked on the DJIA (in alphabetical order by company with their stock symbols in parentheses).

Alcoa (AA)
Altria (MO)
American Express Co. (AXP)
American International Group (AIG)
Boeing (BA)
Caterpillar (CAT)
Citigroup (C)
Coca-Cola (KO)
Disney (DIS)
DuPont (DD)
Exxon Mobil (XOM)
General Electric (GE)
General Motors (GM)
Hewlett-Packard (HPQ)
Home Depot (HD)
Honeywell International Inc. (HON)
Intel (INTC)
International Business Machines (IBM)
Johnson & Johnson (JNJ)
J.P. Morgan Chase (JPM)
McDonald’s (MCD)
Merck (MRK)
Microsoft (MSFT)
Minnesota Mining and Manufacturing (3M) (MMM)
Pfizer (PFE)
Procter & Gamble (PG)
SBC Communications (SBC)
United Technologies (UTX)
Verizon (VZ)
Wal-Mart Stores (WMT)

The Dow has survived as a popular gauge of stock market activity for over a century. Although it’s an important indicator of the market’s progress, the Dow does have one major drawback: It tracks only 30 companies. Regardless of their status in the market, the companies in the Dow represent a limited sampling, so they don’t communicate the true pulse of the market. For example, when the Dow surpassed the record 10,000 and 11,000 milestones during 1999 and 2000, the majority of (nonindex) companies showed lackluster or declining stock price movement.

The roster of the Dow has changed many times during the 100-plus years of its existence. The only original company from 1896 is General Electric. Dow Jones made most of the changes because of company mergers and bankruptcy. However, they made some changes to simply reflect the changing times. In 2004, AT&T, International Paper, and Eastman Kodak were removed from the Dow and replaced with AIG Corp., Pfizer, and Verizon.

The Dow isn’t a pure gauge of industrial activity because it also includes a hodgepodge of nonindustrial companies such as J.P. Morgan Chase and Citigroup (banks), Home Depot (retailing), and Microsoft (software). Because of these changes, it doesn’t adequately reflect industrial activity. During the late 1990s and right up to 2005, true industrial sectors such as manufacturing had difficult times, yet the Dow rose to record levels.

Serious investors look at the following indexes:

Broad-based indexes: Indexes such as the S&P 500 and the Wilshire 5000 are more realistic gauges of the stock market’s performance than the Dow.

Industry or sector indexes: These indexes are better gauges of the growth (or lack of growth) of specific industries and sectors. If you buy a gold stock, then you should track the index for the precious metals industry.

Dow Jones has several averages, including the Dow Jones Transportation Average (DJTA) and the Dow Jones Utilities Average (DJUA). Dow Jones manages both of these indexes more strictly than the Dow. The DJUA sticks to utilities, so it tends to be a more accurate barometer of the market it represents. (The same goes for the DJTA.)

Nasdaq indexes

Nasdaq became a formalized market in 1971. The name used to stand for “National Association of Securities Dealers Automated Quote” system, but now it’s simply “Nasdaq” (as if it’s a name like Ralph or Eddie). Nasdaq indexes are similar to other indexes in style and structure. The only difference is that, well, they cover companies traded on the Nasdaq. The Nasdaq has two indexes (both reported in the financial pages):

Nasdaq Composite Index: Most frequently quoted on the news, the Nasdaq Composite Index covers the more than 5,000 companies that trade on Nasdaq. The companies encompass a variety of industries, but the index’s concentration has primarily been technology, telecom, and Internet industries. The Nasdaq Composite Index hit an all-time high of 5,048 in March 2000 before the worst bear market in its history occurred. The index dropped a whopping 60 percent by 2003 to approximately 2,000.

Nasdaq 100 Index: The Nasdaq 100 tracks the 100 largest companies in Nasdaq. This index is for investors who want to concentrate on the largest companies, which tend to be especially weighted in technology issues, which means it provides extra representation of technologyrelated companies such as Microsoft, Adobe, and Symantec.

In either case, although these indexes track growth-oriented companies, the stocks of these companies are also very volatile and carry commensurate risk. The indexes themselves bear this risk out; in the bear market of 2000 and 2001 (and even extending into 2002), they fell more than 60 percent.

Standard & Poor’s 500

The Standard & Poor’s 500 (S&P 500) tracks the 500 largest (measured by market value) publicly traded companies. The publishing firm Standard & Poor’s created this index. (I bet you could’ve guessed that.) Because it contains 500 companies, the S&P 500 represents overall market performance better than the DJIA’s 30 companies. Money managers and financial advisors actually watch the S&P 500 stock index more closely than the DJIA. Most mutual funds especially like to measure their performance against the S&P 500 rather than against any other index. Mutual funds that concentrate on small-cap stocks usually prefer an index that has more small-cap stocks in it, such as the Russell 2000.

The S&P 500 doesn’t attempt to cover the 500 “biggest” companies. Instead, it includes companies that are widely held and widely followed. The companies are also industry leaders in a variety of industries, including energy, technology, healthcare, and finance. It’s a market-value weighted index.

Although it’s a reliable indicator of the market’s overall status, the S&P 500 also has some limitations. Despite the fact that it tracks 500 companies, the top 50 companies encompass 50 percent of the index’s market value. This situation can be a drawback because those 50 companies have a greater influence on the S&P 500 index’s price movement than any other segment of companies. In other words, 10 percent of the companies have an equal impact to 90 percent of the companies on the same index. Therefore, although the index better represents the market than the DIJA, the index may not offer an accurate representation of the general market.

S&P doesn’t set the 500 companies they track in stone. S&P can add or remove companies when market conditions change. They can remove a company if it isn’t doing well or goes bankrupt, and they can replace a company in the index with another company that is doing better.

Russell 3000 Index

The Russell 3000 Index is a great example of an index that seeks more comprehensive inclusion of U.S. companies. It includes the 3,000 largest publicly traded companies (nearly 98 percent of publicly traded stocks). The Russell 3000 is important because it includes many mid-cap and small-cap stocks. Most companies covered in the Russell 3000 have an average market value of a billion dollars or less.

The Frank Russell Company created the Russell 3000 Index and actually computes a series of indexes such as the Russell 1000 and the Russell 2000. The Russell 2000, for example, contains the smallest 2,000 companies from the Russell 3000, while the Russell 1000 contains the largest 1,000 companies. The Russell indexes don’t cover micro cap stocks (companies with a market capitalization under $250 million).

Wilshire Total Market Index

The Wilshire 5000 Equity Index, often referred to as the Wilshire Total Market Index, is probably the largest stock index in the world. Wilshire Associates started out in 1980 tracking 5,000 stocks. Since then, the Wilshire 5000 has ballooned to cover more than 7,500 stocks. The advantage of the Wilshire 5000 is that it’s very comprehensive, covering nearly the entire market. For investors and analysts that seek the greatest representation/ performance of the general market, they would check out this index. (At the very least, the Wilshire 5000 tracks the largest publicly traded stocks.) It includes all the stocks that are on the major stock exchanges (NYSE, AMEX, and the largest issues on Nasdaq), which by default also include all the stocks covered by the S&P 500. The Wilshire 5000 is a market-value weighted index.

International indexes

Investors need to remember that the whole world is a vast marketplace that interacts with and exerts tremendous influence on individual national economies and markets. Whether you have one stock or one mutual fund, keep tabs on how world markets affect your portfolio. The best way to get a snapshot of international markets is, of course, with indexes. Here are some of the more widely followed international indexes:

Nikkei (Japan): This index is considered Japan’s version of the Dow. If you’re invested in Japanese stocks or in stocks that do business with Japan, you want to know what’s up with the Nikkei.

FTSE-100 (Great Britain): Usually referred to as the “footsie,” this market-value weighted index includes the top 100 public companies in the United Kingdom.

CAC-40 (France): This index tracks the 40 public stocks that trade on the Paris Stock Exchange.

DAX (Germany): This index tracks the 30 largest and most active stocks that trade on the Frankfurt Exchange.

Halter USX China Index (China): This index tracks a basket of 50 U.S. public companies that derive most of their revenues from China. You can track these international indexes (among others) at major financial Web sites, such as www.bloomberg.com and www.marketwatch.com. You may find international indexes useful in your analysis as you watch your stock’s progress. What if you have stock in a company that has most of its customers in Japan? Then the Nikkei can help you get a general snapshot of how well the major companies are doing in Japan, which in turn can be a general barometer of its economy’s well-being. If your company’s business partners or customers are in the Nikkei, and it’s plunging, then you know it’s probably “sayonara” for the company’s stock price.