Question

Explain how investors use these indices to make more informed investing decisions:

      a. Dow Jones Industrial Average (DOW)

      b. NASDAQ Composite Index (NASDAQ)

      c. Standard & Poor's (S&P) 500

Answer 1

a. Dow Jones industrial Average is a price weighted index and it is reflective of all the major stocks in the United States economy and changes in this index can be used for overall sentiments regards to changes in the airlines stock and the energy stocks.

b. Nasdaq composite index is an index of all the major technology companies in the United States and when there is a technology boom, this index will going to shoot up as it can be seen at the time of the Coronavirus crisis it is that Nasdaq composite hitting 52 week high.

Changes in a Nasdaq is an appropriate representation of changes in technology stocks in the economy.

C. Standard and Poor 500 is a value weighted index and it is a reflection of top 500 stocks in the overall economy and it is believed that the most appropriate for reflection of the United States economy, because each stock is appropriately valued according to their price as well as market capitalisation, so these are the truest representation of the United States economy and movement in this index is widely accepted as a movement in the United States economy as a whole.