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Mapping The Market: A Quick Look At The Key Stock Indexes

Keeping tabs on the market is a basic priority for all stock investors. But the constant bombardment of over-excited headlines and television reports can easily confuse the process.

The basic task of tracking the market is not a difficult chore. Among the elements most essential to the process are the variety of indexes that act as basic gauges of the market's ups and downs.

Most investors are at least vaguely aware of the most widely followed indexes: the S&P 500, the Nasdaq composite and the Dow Jones industrial average. Helped by hyper-enthusiastic news channels, many casual investors know when these indexes cross important psychological levels, such as the Dow most recently crossing 15,000.

Want to know what these indexes actually represent, or what portion of the market they map out? Here is a quick guide: For all its brand recognition, the Dow represents a relatively limited picture of the market. Launched in 1896, it is made up of a gradually evolving list of 30 of the market's largest companies. Those range from Alcoa (AA), with a market capitalization of $9 billion, to ExxonMobil (XOM), which weighs in at $403 billion.

The index is price-weighted, meaning higher-priced stocks have a greater impact on the index's movement than do lower-priced issues. This means investors following the Dow don't receive market feedback on the vast majority of growth stocks.

The Dow companies cover a broad core of the U.S. economy, but not transportation or utilities. All but three of those are listed on the New York Stock Exchange, leaving the Nasdaq and American Exchanges largely out of the picture. A rising Dow can indicate overall market confidence. It can also signal investors desiring more stable, dividend bearing blue chip companies.

The S&P 500 (since 1957) has been a much broader gauge. Its 500 issues start at Dean Foods (DF), with a market capitalization of less than $2 billion, and range to Apple's (AAPL) $419 billion value.

Unlike the Dow, the S&P 500 is weighted toward market capitalization, not price. This means larger companies, like Microsoft (MSFT) and Wal-Mart (WMT), exert a disproportionate influence.

While the index is broad, there are broader measures. Consider the Russell 3000, as well as the Wilshire 5000 Total Market Index, which covers the bulk of publicly traded companies in the U.S.

The Nasdaq composite is also broader, listing all of the more than 3,000 companies listed on the Nasdaq exchange. This gives the index a powerful tilt toward computer, Internet and other technology issues. All are rich growth stock territory, but the Nasdaq is also capitalization-weighted, skewing it toward the larger stocks within those areas.

On the "What's The Market Trend?" page (today on B2), go to the top of the Nasdaq daily chart. You can see the individual weighting of the 32 largest companies on that index. In Monday's IBD, Apple is No. 1 at 6.8%. Also, don't confuse the Nasdaq Composite with the Nasdaq 100, which tracks the 100 largest non-financial companies on the exchange.

Scores of other indexes dial in to more specific market segments. The Russell 2000 and S&P 600 are important gauges of smaller cap stocks. You can track these in the Market Indexes table (today on B9), as well as IBD's New America index, the Dow utilities and many others.