Wall Street in Brief

(eToro Blog) New York City’s financial district is known around the world as Wall Street; for all intents and purposes it is an actual street in downtown Manhattan, given the name for an actual wall that was supposedly built some time in the mid 1600’s to protect Dutch settlers. Now, Wall Street has become synonymous with money, wealth and power; it is a true capitalistic bastion. Now, when you hear Wall Street mentioned in the news or read about it in the newspaper or online, the reference is usually to one or all of the New York-based stock markets, i.e. the American Stock Exchange, the New York Stock Exchange or the National Association of Securities Dealers Automated Quotations.

Narrowing it down further still, the Wall Street reference is likely applicable to one of the key indices which trade on those markets, namely the DJ30, the SPX and the NASDAQ. Though a reference to Wall Street, as in “Wall Street was higher today,” suggests that they are a collective group, that’s not an entirely accurate observation. What they have in common is that they are each a composite measure of the best performing stocks within that particular market, but that’s where the similarities end. How they accomplish that task is different one to the other.

The key difference which accounts for the reason why the indices don’t always move in tandem is the calculation of value. The methodology to calculate the market value is different for each of the indices. The DJ30, for instance, gives a greater weight to those stocks with the highest price per share. A stock which sells for $200 a share has greater weight than another at $100 a share. The S&P500 gives a greater weight to the shares floating or in circulation. Companies that have the largest value of shares available for public trading are given the highest weight. That eliminates from the top tier those companies that have large privately or family-owned shares of stock. On the NSDQ100, the composite is weighted on market value; companies then with the greatest market value hold the positions of power on the NSDQ100.

To a lesser extent, selection can play a part; the DJ30 is generally comprised of what we now call blue-chip stocks, those which are exceptionally well known and has no foreign entities. Among the 30 blue-chips are AT&T, Coca-Cola, Exxon, Walmart and Walt Disney.

The calculation methodology tends to allow the S&P500 to have a broader representation on its indices, which include various industry groups and sectors, and it includes foreign corporations. Colgate Palmolive, Honeywell, Johnson & Johnson, McDonald’s and NetFlix are but a few of the S&P500’s components.

The NASDAQ-100 is well known for its predominance of technology related stocks like Apple, Dell and Yahoo, but also as a composite with 100 components has a fair few non-tech stocks as well including retailers like Bed, Bath and Beyond, Staples and Starbucks Corporation; of note, the index does not contain any financial corporations.

Copyright 2012 eToro Blog