A:

The most important equity market indexes are the S&P 500, Nasdaq Composite and Russell 2000. These indexes in total provide a comprehensive view of the stock market and insight into economic trends. Each is a benchmark with a specific focus. Typically, they move in the same direction, but the intensity of the move can differ based on market conditions, economic factors and investors' inflows.

S&P 500

The S&P 500 is composed of 500 stocks chosen for their representations of the economy. The index is weighted by market capitalization so a larger company has more influence on the index than a smaller company. Components of the index are chosen by Standard & Poor's. Occasionally, companies are added or dropped from the index depending on changes in the economy. The S&P 500 is considered the best representation of large-cap stocks, and most investors and traders use it is a benchmark for the whole stock market.

Nasdaq Composite

The Nasdaq is unique in that it is a technology-heavy index. Many of the fastest-growing, most innovative companies are listed on the Nasdaq. It is also weighted by market capitalization. Two factors that make the Nasdaq important are its concentration of riskier stocks and the number of foreign companies listed on it. For these reasons, the Nasdaq tends to be more volatile than the S&P 500.

Russell 2000

The Russell 2000 is important because it represents the small-cap universe. These smaller companies tend to be more exposed to the domestic economy and are more leveraged to the economy given their smaller size and balance sheets. Thus, this index is considered a leading indicator for the economy. When traders are anticipating improving economic conditions, they pile into the Russell 2000.

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