Coinspeaker
What Is NYSE Composite Index and How Does It Work?
Places where companies list their stocks for trading are known as stock exchanges, the largest ones include the New York Stock Exchange (NYSE), NASDAQ Exchange, Shanghai Stock Exchange, London Stock Exchange, and more. The list of sectors to choose from for investing is endless. To indicate the performance of a specific industry, there are market indices that track the performance of a certain group of stocks, bonds, or other investments.
The NYSE Composite Index measures the performance of all common stocks listed on the NYSE. What does the NYSE Composite Index do? How does it work? What companies are available on the NYSE exchange? This guide gives detailed information on the NYSE, the NYSE Composite Index, and its distinct difference compared to other indexes.
What Is NYSE Composite Index?
The NYSE Composite Index is a trackable record that shows the performance of all the stocks listed on the New York Stock Exchange. The NYSE Composite Index measures the performance of over 2,400 US and foreign companies’ common stocks. Notably, about one-third of the stock exchange’s total capitalization is attributed to foreign companies, including those from China, the United Kingdom, Mexico, Japan, Canada, and more. In total, it encompasses at least 38 countries.
The NYSE Composite Index serves as a guarantee of quality as the NYSE has rigid listing requirements that companies must meet to list their shares for trading. These strict conditions have contributed to the platform’s high standards. And as said above, the NYSE Composite Index prides itself on its global diversification. The stock exchange harbors several international companies, attracting investors who desire to spread their portfolios across multiple geographical locations.
NYSE Composite Index: Milestones
The first inception of the NYSE Composite Index was in 1966, with a base of 50 points equal to the December 1965 close. Following its launch, the stock exchange was managed by Securities Industry Automation Corp until 2003, when it was reintroduced with the help of the Dow Jones Index. The index was relaunched with a new methodology that conforms with the index standards applied by other top US indexes. The reintroduction raised the base value from 50 points to 5,000, equal to the 2002 yearly close.
After the NYSE Composite Index was assigned a value of 50 points at its launch, it experienced a lifetime low of 347.77 in October 1974. It also fell below 5000 at 4650 on November 20, 2008. A significant milestone for the stock exchange was the first time the index reached 10,000 points on June 1, 2007. Another achievement was recorded on January 17, 2020, when it saw a new record closing high of 14,183.20.
NYSE Industry Categories
The NYSE Composite Index includes indices from four different industry categories. They are:
- Financial companies. These companies provide investing, banking, insurance, and other financial services. They also offer financial products such as goods, investments, and accounts.
- Industrial companies. They are involved in the production of capital goods, which are widely used for manufacturing or construction. In addition, industrial companies make and sell equipment, machinery, and supplies required for resource extraction.
- Utilities. These companies offer essential services that contribute to economic and social development. Examples of these services are water, gas, and electricity.
- Transportation. This sector comprises companies that offer logistics services for both people and goods. Airlines, railroads, airports, and more fit into this category.
How NYSE Composite Works
The NYSE Composite uses a market cap to calculate the weights of the index constituents. Meanwhile, the index weights are calculated based on the price return and total return. Basically, investors spread their portfolios across the different constituents of the NYSE Composite Index, such as large-cap stocks, mid-cap stocks, and small-cap stocks.
- Large-cap stocks: investors and analysts refer to publicly-listed companies with a market valuation of $10 billion or more as large-cap companies. These companies are perceived as stable and steadily pay dividends to investors. Companies with such a valuation are usually major players in their distinct industries.
- Mid-cap stocks: mid-cap companies are smaller than large-cap companies and boast market valuations of between $2 billion and $10 billion. They are not as stable as large-cap companies, hence considered riskier. More importantly, mid-cap companies are more exposed to economic turmoil as they are usually a few years old and serve new industries.
- Small-cap stocks: small-cap companies have a market capitalization of between $300 million and $2 billion.
While it is established that the NYSE Composite measures the performance of all common stocks listed on the New York Stock Exchange, there is a list of what it measures and what it does not.
NYSE Composite Index measures the following categories:
- American Depository Receipts (OTC: ADRS). ADR is a negotiable certificate that represents the securities of a foreign company and allows such to trade in the US markets. It refers to the entire issuance of shares by a foreign company.
- Real estate investment trusts (REITs). Most REITs, which own or finance income-producing real estate across diverse property escorts, trade on top stock exchanges.
- Tracking stocks. They are special equity offerings issued by a parent company. The tracking stock, known as letter stocks or targetted stocks, trades in the open market separately from the parent company’s stock.
On the other hand, the NYSE Composite Index does not measure the following:
- Limited partnerships. A partnership is made up of two or more partners, but one of them becomes the general partner running the business while the others do not partake in the management. However, the general partner has unlimited liability for the debt, while the limited partners have limited liability up to the amount of their investments.
- Derivatives. Derivatives trade on exchanges or over the counter. They are financial contracts that derive value from an underlying asset, a benchmark, or a group of assets.
- Exchange-traded funds. Registered with the US Securities and Exchange Commission (SEC), they offer ways to pull money in funds that invest in bonds, stocks, or others.
- Trust units. They are established under a trust deed. A unit trust is a connective investment compounded under s trust deed.
NYSE Composite vs Other Indexes
While the Nasdaq Composite Index, the S&P 500 Index, and the Dow Jones Industrial Average (DJIA) are the most broadly followed indexes in the US, the NYSE Composite outperformed the three in 2004, 2005, and 2006.
While the NYSE Composite measures thousands of stocks, including stocks of foreign companies, the S&P 500 comprises 500 US companies. Also, the activities that occur in the index reflect movement in the entire US market. The platform is designed to be capitalization-weighted, as each stock represents its total market valuation. Hence, the index drops as the market value of the 500 companies declines.
On the other hand, the Dow Jones Industrial Average Index accommodates the stocks of 30 of the most influential companies listed on stock exchanges in the US. Unlike other stock indexes that use market capitalizations, the DJIA is price-weighted. In addition, the Dow is perceived to be limited compared to the NYSE Composite because it less represents the entire market as its major focus is on some of the largest US companies.
Furthermore, the Nasdaq Composite Index is heavy on tech stocks, such as top technology companies Apple Inc (NYSE: AAPL), Microsoft Corp (NYSE: MSFT), Amazon.com Inc (NYSE: AMZN), etc.
Conclusion
The NYSE Composite Index is crucial in the analysis of equity markets. Its value also informs investors of the current occurrence as they indicate macroeconomic trends, investing tendencies, and risk levels. Particularly, it is essential to understand the companies on the NYSE Composite Index before making investment decisions.