Stock market indexes: S&P 500, Dow, Nasdaq and Russell explained

A stock market index is a number that tracks the value of a defined basket of stocks. When a news anchor says "the market fell 1% today," they are quoting an index, usually the S&P 500 or the Dow Jones Industrial Average. An index turns thousands of individual price moves into one figure you can follow, compare and, through an index fund, invest in.

Indexes look alike on a screen, but they are built very differently. The Dow averages 30 share prices. The S&P 500 weights 500 companies by their market value. The Nasdaq-100 skips banks entirely, and the Russell 2000 deliberately leaves out the largest companies. Those design choices decide what an index measures and why two "market" numbers can move in opposite directions on the same day.

This guide explains the four index families US investors meet most, the three weighting methods with worked numbers, and what five years of data from the ETFs that track them reveal about how much the design matters.

What an index is, and why it exists

An index provider writes a methodology: a public rulebook that says which stocks are eligible, how many are included, how each is weighted, and how often the list is reviewed. It then calculates the index level continuously during the trading day from the prices of its members.

Indexes serve three purposes:

1. Measuring the market. "The S&P 500 rose 0.8%" is a compact way to describe how large US companies did today.
2. Benchmarking. A fund manager who buys large US stocks is judged against the S&P 500. If the fund lags it after fees, investors notice.
3. Investing. An index fund or ETF buys the index's members in the index's proportions, so its return tracks the index minus a small fee. The SEC's Investor.gov describes index funds as a low-cost way to get broad diversification.

The index level itself has no meaning in dollars. The S&P 500 at 7,500 does not mean anything costs $7,500. It means the basket is worth 750 times what it was worth at the index's base date, when the level was set to 10. What matters is the percentage change.

The three ways to weight an index

Take three illustrative companies:

Price-weighted

A price-weighted index adds up the share prices and divides by a number called the divisor. Each stock's weight is its price divided by the sum of prices. Company size plays no role.

Here the prices sum to $450. A has a weight of 300 ÷ 450 = 66.7%, B 50 ÷ 450 = 11.1%, and C 100 ÷ 450 = 22.2%. B is the second-largest company but has the smallest influence, simply because its shares are cheap.

Market-cap weighted

A market-cap weighted index weights each company by its market value: price times shares. S&P and FTSE Russell use float-adjusted market cap, counting only shares available to public investors and excluding large blocks held by insiders, founders or governments.

Total market cap is $550 billion. A weighs 300 ÷ 550 = 54.5%, B 200 ÷ 550 = 36.4%, and C 50 ÷ 550 = 9.1%. Now B matters four times as much as C, which reflects their actual size.

Equal-weighted

An equal-weighted index gives every member the same weight at each rebalance, here 33.3% each. It tilts toward smaller companies compared with a cap-weighted index and has to sell recent winners and buy recent losers at every rebalance to restore equal weights.

Why the divisor changes

In a price-weighted index, a stock split would distort the level if nothing were done. Suppose our three-stock index starts with a divisor of 3, so its level is 450 ÷ 3 = 150. Now A splits 3-for-1 and its price becomes $100. Nothing about the company's value changed, but the sum of prices drops to $250, and with the old divisor the index would fall to 83.3.

To prevent that, the provider cuts the divisor so the level is unchanged: 250 ÷ new divisor = 150, so the new divisor is 250 ÷ 150 = 1.667. The side effect is that A's weight falls from 66.7% to 100 ÷ 250 = 40%. In a price-weighted index, a split reduces a company's influence. Cap-weighted indexes have no such quirk, because a split leaves market cap unchanged.

The major US indexes

S&P 500

The S&P 500, maintained by S&P Dow Jones Indices, is the standard benchmark for large US companies and the index most US equity funds are measured against. It holds about 500 companies (a few more share classes, because some companies, such as Alphabet, have two listed classes) and is float-adjusted market-cap weighted.

Membership is decided by an index committee applying published criteria. A company must be US-domiciled, have an unadjusted market capitalization of at least $22.7 billion (the threshold set in July 2025; S&P reviews it quarterly), have at least 10% of its shares available to the public, be adequately liquid, have been public for at least 12 months, and have positive reported earnings over its most recent four quarters combined and in its latest quarter. Meeting the rules makes a company eligible; the committee decides whether and when it joins. Share counts and float factors are updated quarterly.

Because the S&P 500 is cap-weighted, its largest members drive much of its movement. When a handful of very large technology companies rally or fall, the index follows them even if most of its members do the opposite.

Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA), first published in 1896, is one of the oldest US indexes; only its sister, the Dow Jones Transportation Average (1884), is older. It contains just 30 large US companies picked by a committee at S&P Dow Jones Indices for their reputation and breadth across the economy; transportation and utility companies are excluded because they have their own Dow averages. Membership changes are rare and announced in advance; on June 23, 2026 S&P DJI announced that Alphabet (GOOGL) would replace Verizon in the average, effective June 29, 2026.

The Dow is price-weighted, exactly as in the worked example above, with a divisor far below 1. That means a one-dollar move in any member moves the Dow by the same number of points, roughly six points per dollar with a divisor near 0.16 (approximate, as of late 2024; the divisor changes with every split and membership change), whether the company is worth $100 billion or $3 trillion. The highest-priced stocks have the greatest influence, which is why the Dow can rise on a day the S&P 500 falls.

Point changes in the Dow also look dramatic because the level is high. A 500-point drop from 50,000 is a 1% decline, an ordinary day.

Nasdaq Composite and Nasdaq-100

Two different indexes share the Nasdaq name, and they are easy to confuse.

• The Nasdaq Composite includes essentially every common stock listed on the Nasdaq Stock Market, more than 3,000 of them, weighted by market cap. It has no size or quality screen beyond being listed on Nasdaq.
• The Nasdaq-100 holds the 100 largest non-financial companies listed on Nasdaq. Banks, insurers and other financials are excluded by rule. It uses a modified market-cap weighting that caps the largest members so no single company or group of companies can dominate past set limits. It is reconstituted once a year in December and rebalanced quarterly.

Because Nasdaq lists so many technology and internet companies, both indexes are heavily weighted toward those industries. The Nasdaq-100 is the index the QQQ ETF tracks.

Russell 1000, 2000 and 3000

FTSE Russell's US indexes are built mechanically by ranking US companies by total market cap, without a selection committee:

• Russell 3000: roughly the 3,000 largest US companies, a proxy for nearly the whole investable US stock market.
• Russell 1000: the largest 1,000 of them, the large- and mid-cap segment.
• Russell 2000: the next 2,000 (ranks 1,001 to 3,000), the most widely followed small-cap benchmark.

All three are float-adjusted market-cap weighted. The membership is refreshed at a reconstitution. Through 2025 that happened once a year, in June. Starting in 2026 FTSE Russell moved to semi-annual reconstitution: the December 2026 rebuild uses company sizes as of a rank day of October 30, 2026, with changes taking effect after the close on December 11, 2026.

Side-by-side

Five years of the four main index ETFs

The chart puts four ETFs on the same footing by starting each at 100. Each one tracks one of the indexes above, so the gaps between the lines are mostly the gaps between index designs. Measured from the week of October 25, 2021 to the close of October 29, 2026, on weekly closes and excluding dividends:

Three lessons come out of that table.

Concentration cuts both ways. QQQ, heavy in large technology companies, had the best five years and also the deepest fall, losing more than a third of its value in the 2022 rate shock before recovering.

"The market" depends on which market. Small companies, measured by IWM, gained less than a third as much as the Nasdaq-100 and fell almost as hard. An investor who owned only small caps had a very different five years from one who owned the S&P 500.

Weighting changes the result, not just the members. DIA's 30 price-weighted stocks lagged SPY by more than 20 percentage points even though both track large US companies.

None of this predicts the next five years. Leadership between large and small, growth and value, has rotated many times over longer histories.

Price return versus total return

Most headline index levels, including the S&P 500 and the Dow quoted on the news, are price-return indexes: they ignore dividends. Providers also publish total-return versions that assume every dividend is reinvested. Over long periods the difference is large. For an index yielding 1.5% a year, total return compounds roughly 1.5 percentage points a year faster than price return. When you compare a fund's performance with an index, make sure both include dividends, or neither does.

How investors use indexes

As a yardstick. Comparing your stock picks with an index answers a simple question: would a cheap index fund have done better? Choose the index that matches what you own; a small-cap portfolio should be measured against the Russell 2000, not the Dow.

As an investment. Index funds and ETFs are among the lowest-cost ways to own a diversified portfolio. Their main costs are the expense ratio and small tracking differences from trading and cash holdings.

As a market thermometer. Checking several indexes together tells you more than any one. A day when the S&P 500 rises but the equal-weighted S&P 500 and the Russell 2000 fall says a few large companies are carrying the market.

Pitfalls and limitations

• Cap-weighted indexes concentrate. As the biggest companies grow, they take a larger share of the index. "Diversified" can quietly become "dominated by a few names."
• Index changes move prices. When a stock is announced as joining a major index, funds must buy it, which can push its price up before the change takes effect.
• Survivorship. An index's long history looks smooth partly because failing companies are dropped and replaced. Index investors lose money on those failures along the way, but the index itself carries on.
• The Dow's design is a historical artifact. Price weighting made sense when it was calculated by hand. Today it means stock splits and share prices, not business size, set each member's influence.
• Index levels aren't comparable across indexes. The Dow at 50,000 and the S&P 500 at 7,500 tell you nothing about which did better; compare percentage changes over the same dates.

How Finabase helps

The indices page lists the major US indexes alongside Canadian, European, German and Asia-Pacific indexes and bonds, each with its latest level and change. The heatmap draws the Dow, S&P 100, S&P 400 and S&P 500 as maps grouped by sector and industry, so you can see which members are carrying an index on a given day. Index ETFs have full symbol pages, such as SPY, with a chart you can compare with other symbols.

For what an index is made of at the smallest level, see What is a stock? A complete beginner’s guide to shares.

Frequently asked questions

What is the difference between the S&P 500 and the Dow?

The S&P 500 holds about 500 large US companies weighted by market value. The Dow holds 30 weighted by share price. The S&P 500 is the broader and more representative measure of large US stocks; the Dow is older and better known, but its price weighting gives high-priced stocks outsized influence.

Can you invest directly in an index?

No. An index is a calculation, not a product. You invest through a mutual fund or ETF that holds the index's stocks, such as SPY or VOO for the S&P 500, and pay a small annual fee.

Why is the Russell 2000 used for small caps?

Because it is built mechanically from ranks 1,001 to 3,000 by market cap, with no committee judgment, so it captures the broad small-company segment of the US market. It holds about 2,000 stocks, far more than most small-cap alternatives.

Is the Nasdaq-100 the same as the Nasdaq Composite?

No. The Composite includes more than 3,000 Nasdaq-listed stocks. The Nasdaq-100 holds only the 100 largest non-financial ones, with caps on the biggest weights. They tend to move together because the largest companies dominate both.

How often do index members change?

It depends on the index. The S&P 500 changes whenever its committee acts, often several times a quarter. The Nasdaq-100 reconstitutes each December. The Russell indexes reconstitute twice a year from 2026. The Dow changes rarely, sometimes not for years.

Summary

A stock index is a rulebook turned into a number: which stocks, how many, and how much each counts. The Dow weights 30 stocks by price, so cheap shares barely matter and splits change influence. The S&P 500, Nasdaq-100 and Russell indexes weight by market value, so the largest companies lead. Over the five years to October 2026 those choices separated an 85% gain from a 25% gain among the ETFs that track them. Knowing how an index is built tells you what it measures, which fund tracks it, and which yardstick fits the portfolio you actually own.