Finance Question For Readers


Can someone please explain to me why over the course of a trading day, the little “squiggly” ups and downs of the Dow Jones Industrial, NASDAQ, and S&P 500 stock indices are nearly all exactly synchronous, even though the overall percent change for each index can be quite different (such as yesterday)?

Comments

  1. matty1 says

    Are they all samples from the same larger population of listed shares? If so they may be tracking changes in that larger population.

  2. Midnight Rambler says

    A lot of the trading is done by mutual funds, which often include stocks in all three indices. But the Dow only has 30 stocks in it, so big trades in one or a few stocks can influence it, which is probably why it has that big spike early in the day that the others don’t, and ended the day up.

  3. Midnight Rambler says

    Also, the whole point of a stock index is to act as barometers of the market as a whole, so if they have different compositions but show more or less synchronous changes, that’s actually a good thing. And when they diverge a lot (particularly the NASDAQ, which is tech-heavy), it shows when certain segments are performing differently from the general market.

  4. Gregory says

    Speaking as someone who works in the securities industries….

    For starters, you need to know what the indexes are. The Dow Jones Industrial Average (DJIA) is a of 30 large stocks. It was created more than a hundred years ago to indicate the strength of America’s industry, hence the name. It still represents a cross-section of American business. It is a “weighted” average, with each stock adjusted to reflect various changes since it was first added to the “basket” to account for things like stock splits and dividend payments.

    The NASDAQ Composite is an index of all the more than 3,000 securities traded on the NASDAQ exchange. It was created for the buying and selling of “over the counter” stocks considered too small for a national exchange. Companies in every industry are represented in the composite.

    The S&P 500 is an index created by Standard & Poor, one of the US’ oldest financial services firms. It is calculated based on the price of 500 very large companies; like the DJIA, it is a weighted average.

    None of these indexes are mutually exclusive. All of the stocks that make up the DJIA are also on the S&P 500; significant changes in the price of a DJIA stock will have a significant impact on the S&P 500. Microsoft is part of the DJIA so it is also part of the S&P 500; it is also traded on the NASDAQ exchange, so it is part of the NASDAQ composite. Many stocks in the S&P 500 are NASDAQ stocks, so changes in any of them will affect both of those indexes.

    Lastly, you have to consider the “market movers.” These are mutual funds, clearinghouses, investment banks… firms who routinely buy and sell stocks in vast quantities of shares at a time. They do not often focus on individual stocks; rather, they look at the entire industry. Bad news about JP Morgan Chase might trigger a massive sell-off of all banking stocks; it may also be seen as an opportunity to buy, buy, buy. In either case, you will see hundreds of thousands of shares trade hands. This affects all three indexes, typically driving all of them up or down pretty closely.

    However, the indexes are NOT in lock-step because the indexes are different. The NASDAQ Composite shows a very broad cross section of American corporate business; the DJIA shows how representatives of “core” industries are doing; the S&P 500 is large corporations that influence but do not necessarily shape the overall economy. There is a whole field of economic analysis dedicated to ferretting out what these differences mean.

  5. Blattafrax says

    It’s the same explanation as for a 100m race where Usain Bolt will arrive somewhat earlier than I would. We all go the same way for the same reasons, but there are other factors that explain the speed we do it.

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