[rostpribru]

This is probably a dumb question, but I'm having trouble understanding these indexes, I'm sure someone on here gets it. I've tried looking it up but still can't quite get it figured out.

I know that the Dow Jones average is composed of like 30 big stocks like: Microsoft, Wal-Mart, Alcoa, Exxon, etc... but this index is price weighted right? Well what exactly does the 10,600 number represent? What can you get off looking at this number? I know the divisor changes every now and then, but I don't get what the 10,600 means or can tell you...

And then the S&P 500 is 500 stocks from Standard and Poor's, and this index is not price weighted I guess, but I guess it is suppose to tell you your return or something? How do you read this number and what does it tell you like if it's at 1,100?

[banditorfv]

The DJIA is computed as follows:

http://en.wikipedia.org/wiki/Dow_Jon...ge#Calculation

It doesn't really tell you much because higher-priced stocks have a greater influence on the movement of the index irrespective of the size of the company in question, which is madness.

The S&P 500, by contrast, is weighted by the capitalization of its components, so the #1 company in the index will be the largest by market cap and will as such have much greater influence on the index's movement than say the 500th position company. This index is basically a market analog. The price on any given day doesn't tell you much, but when compared to other days it gives you some indication as to the broad performance of the market. If you intend to use the S&P 500 as a benchmark for calculating returns, you should use the adjusted index because there's a dividend paid. Just using the unadjusted value of the index doesn't include all the returns it has paid out historically.