This article is a continuation of the Going Global article series. If you haven’t read the first article, check it out here: Going Global: How do I Start Trading Internationally?
Now that we’ve gone around the globe and taken a look at some of the most prominent stock markets, it’s time to delve deeper into the US markets. Typically, many Filipino investors looking to diversify their portfolio begin with the US stock markets as these are the most reliable and accessible from here. We’ve already gone over the two main exchanges, the New York Stock Exchange and NASDAQ, in the last article, but here, let’s go even deeper into these exchanges and the indexes that guide them, in order to truly understand their complexities. Additionally, we will take a look at the Dow Jones Industrial Average, another important index in the US markets.
The New York Stock Exchange
The NYSE is the largest stock exchange in the world. Dating back to 1972 and with over 1,900 companies listed, it’s no surprise that it’s a hallmark in the world of investing. For a company to be listed in the NYSE, it must have at least 400 shareholders each owning more than 100 shares of stock, at least $1.1M shares of publicly traded stock, a market value of at least $40M, and it’s Initial Public Listing (IPO) must have a market value of at least $100M. Additionally, it must meet basic earning standards, which is either a pre-tax income of $10M or $200M in global market capitalization. As the exchange also houses international companies, these companies must meet the additional standards of having at least 2.5M shares outstanding and 5,000 public shareholders. With that long and exhaustive list of requirements, the quality of every company is assured. Another benefit of the NYSE is its global diversification, with stock listings from around the globe, including countries like Canada, China, and the UK.
To track the performance of its stocks, the exchange uses the NYSE Composite Index. It measures all stocks that are exclusively listed on the NYSE. The weights of the index are calculated based on the company’s market capitalization – the total market value of its stocks – while the index itself is calculated on the basis of price return and total return. The NYSE Composite Index is maintained by the S&P Dow Jones Indexes, a resource that tracks many other indexes and data regarding financial markets.
NASDAQ
Short for National Association of Securities Dealers Automated Quotations, it is the second-largest stock exchange after the NYSE in the world. It’s known for being dominated by technology giants such as Apple, Microsoft, IBM, and Facebook. However, the NASDAQ also lists a number of other influential companies in the fields of finance, energy, transportation, and healthcare. It’s listing requirements include having a shareholder’s equity of at least $2M, at least 100,000 public shares, a minimum of 300 shareholders, total assets worth $4M, a minimum of $3 per stock price, and public market value of at least $1M. As with the NYSE, this exhaustive list of requirements ensures the utmost quality of each company listed.
The NASDAQ-100 is the index used to track its stocks. Unlike the NYSE Composite Index, it tracks the price movement of only the top 100 largest stocks listed in NASDAQ. Additionally, it does not include financial institutions listed. It utilizes a weighting system to calculate the index, which limits the influence of large firms’ indexes by taking into account overbearing market capitalizations. This allows for a more accurate representation of the exchange. The index price is also calculated during pre and post-market hours, with market hours being from 9:30 AM – 4:00 PM (EST).
Dow Jones Industrial Average (DJIA)
The DJIA is an index in itself which is not tied to any specific stock exchange. It differs from the NYSE Composite Index and NASDAQ-100 because it is composed of 30 major companies that are leaders in their industry regardless of the exchange they are listed on. This index is run by the Wall Street Journal, whose editors make decisions about what companies make the cut. The DJIA only includes US-based companies that are traded either on the NYSE or NASDAQ. The purpose of the DJIA is to give an accurate and succinct overarching view of the US market – no trading goes through it, as trading only goes through the NYSE or NASDAQ. This index is widely viewed as the top representation of how the market is doing, with many top news channels and platforms displaying its calculations on a daily basis.
Standard & Poor’s 500 Index (S&P 500)
The Standard & Poor’s 500 Index, or commonly referred to as the S&P 500, is an index based on the market capitalization of the 500 largest publicly-traded companies in the US. This index is known to be the best basis or gauge of large-cap US equities. Investors use this as the benchmark for the overall market.
Why should I know all this?
If you’ve got this far thinking, “Well, this is all great to know, but how will this help me in my investing journey at all?” then that is totally understandable. Knowing what the stock exchanges are and the indexes that calculate their value may not seem that important, but having a good grasp of all this will also help you make wiser decisions when it comes to your investing practices. It’s much better when you are able to identify and understand the terminology used when referring to the different stock exchanges and their indexes, as well as the all-important difference between the DJIA and other stock indexes. This information is important as a first stepping stone into the US markets, with more exploration and discovery to come once you truly partake in the markets, because, as the saying goes, “Experience is the best teacher.”
The Going Global series aims to introduce traders, whether beginners or advanced, to the international stock markets. Throughout this series, we will explore the pros and cons of international investing, how to kickstart your international portfolio, and many more tips to navigate this more complex trading world.