Stocks, ETFs and indexes

The difference between owning a company, owning a fund and watching an index, and how the best-known US indexes are built.

The markets page has three tabs of traditional assets: stocks, ETFs and indexes. They are often quoted side by side and they all have prices that move, but they are different kinds of thing. Mixing them up leads to confused comparisons.

Stocks

A share of stock is a small slice of ownership in one company. Its price rises and falls with what investors expect the company to earn in future, plus everything that moves markets in general: interest rates, the economy, mood. Holding one stock concentrates your exposure on that single business, its results, its management and its news.

Funds and ETFs

A fund pools money from many people and buys a collection of investments. An exchange-traded fund (ETF) is a fund whose shares trade on a stock exchange during the day, just like a stock. You buy and sell it through a broker at a market price.

Many ETFs aim to track an index: they hold the index's members in roughly the same proportions, so their price follows the index closely.
Others hold a sector, a country, bonds, commodities or a strategy chosen by a manager.
Each fund charges a yearly fee, quoted as an expense ratio. A ratio of 0.10% costs $1 a year for every $1,000 invested; it is taken out of the fund's assets rather than billed to you.

Because an ETF holds many things, a 1% move in a broad ETF usually reflects a broad move in the market, while a 1% move in a single stock might be about that company alone.

Indexes

An index is a measurement, not an investment. It is a number calculated from the prices of a defined list of stocks, used to describe how a market or a slice of it is doing. You cannot buy an index directly; you buy a fund that tracks it.

The three US indexes you see most often are built quite differently:

S&P 500: about 500 large US companies chosen by a committee, weighted by market value (adjusted for shares available to the public). The biggest companies move it most. It is the usual yardstick for "the US stock market".
Nasdaq-100: the 100 largest non-financial companies listed on the Nasdaq exchange, also weighted by market value. It leans heavily towards technology.
Dow Jones Industrial Average: just 30 large companies, weighted by share price rather than size. A company with a high share price moves the Dow more than a bigger company with a lower share price, a quirk of its very long history.

Because of these differences, the three can move in different directions on the same day. A strong day for a few large technology companies can lift the Nasdaq-100 while the Dow falls.

Weighting matters

In a market-value-weighted index, a small number of very large companies can account for a large share of the total. When they move together, they can carry the index even if most members fall. The heat map guide shows how to spot this with "breadth".

Commodities and the other tiles

The overview also shows gold, silver and oil. These prices come from futures contracts, agreements to buy or sell a commodity at a future date, which trade almost around the clock on weekdays. They are not the same as the price of a coin or bar in a shop, and not the same as the price of a commodity ETF, although they usually move together.

Prices only

Market Check shows price changes. Many stocks and funds also pay dividends, which are part of an investor's return but do not appear in a price chart. Over long periods the difference can be large. Nothing here is financial advice.