By Kim Clark
From Kiplinger’s Personal Finance
Today, there are an estimated 3 million indexes that provide benchmarks against which to measure investment performance and serve as recipes for the portfolios of a vast number of indexed mutual and exchange-traded funds.
Here’s a quick summary of some of the most common indexes. Most weight their members based on market value, calculated by multiplying the stock price by the number of outstanding shares.
The S&P 500 index, launched in 1957, represents about 80 percent of the dollar value of the U.S. stock market. Though it tracks 500 firms, the index contains 503 stocks because a few members, such as Google owner Alphabet, issue more than one share class. The stocks are chosen by a secret committee convened by the owner of the index, S&P Dow Jones Indices. Committee members select generally large—but not necessarily the largest—U.S.-based firms they believe best represent the overall market while trying to keep changes to a minimum.
The Dow Jones industrial average, the granddaddy of market barometers, was created by Wall Street Journal founder Charles Dow in 1896. It is now also managed by S&P Dow Jones Indices, where a committee handpicks…