What it means
Most people know the Dow Jones Industrial Average, which tracks only 30 companies, or the S&P 500, which tracks 500. The NYSE Composite Index is much broader because it includes essentially all common stocks listed on the exchange, often well over a thousand companies.
It also covers real estate investment trusts and certain other listed securities, which means it captures a wide range of sectors and company sizes. The index is weighted by free-float market capitalisation.
That means each company's weight reflects the value of the shares actually available to trade, rather than all shares in existence, so larger companies have more influence on the index level. The total is divided by a number called the divisor, which is adjusted for events such as new listings and delistings so that those changes do not move the index by themselves.
Because it covers all the exchange's listed stocks, the index is a useful gauge of the general direction of large and mid-sized companies. It includes many non-US companies listed in the form of depositary receipts (certificates representing shares in a foreign company), so it can be affected by global factors as well as the US economy.
Investors do not buy the index directly, but they can use funds and futures that track it or use it as a benchmark for performance. A fund manager whose portfolio rose 8% when the index rose 10% has underperformed that benchmark.
Analysts should be aware of the limits. The index is dominated by larger companies, includes only NYSE listings and therefore leaves out stocks listed solely on other exchanges, and its level on its own says little without comparing it to earlier levels or other indexes.
Total return versions of the index also exist, adding reinvested dividends to the price movement. For long-term comparisons, the total return figure gives a fairer picture of what an investor actually earned.
In practice
Real-world examples.
Example
A fund manager compares her portfolio of mid-sized US companies to the NYSE Composite Index over five years. She finds that her portfolio returned 4% a year more than the index, and uses this to show clients her added value.
Example
A financial journalist writes that the NYSE Composite rose 1.5% in a day, while the Dow rose only 0.8%. She explains that smaller and mid-sized companies, which are included in the broader index, performed strongly.
Example
A company treasurer examines the index as a gauge of market conditions before deciding whether to issue new shares. A strong rally helps support the decision.
Formula
Calculation
Index level = Total free-float market capitalisation / Divisor
Suppose the total free-float market capitalisation of all listed stocks is $20,000,000,000 and the divisor is 10,000,000. Index level = $20,000,000,000 / 10,000,000 = 2,000. If market values rise 3% to $20,600,000,000, the index becomes $20,600,000,000 / 10,000,000 = 2,060, which is a 3% rise from 2,000.Case study
Seen in the real world.
Oakmont Capital is a fictional investment firm that manages a pooled fund of US equities. Its clients asked why the fund's performance looked weak when the Dow was rising strongly. The fund manager explained that the Dow only tracks 30 large companies and was not a fair comparison for a broad portfolio.
The team moved to the NYSE Composite Index as its main benchmark because the fund held many mid-sized and foreign-listed companies. Against the broader index, the fund had actually outperformed by 1.2% over the year.
In this illustrative story, the firm updated its client reports to show performance against both the broad index and its peers. The chief investment officer emphasised that choosing the right benchmark is as important as the performance number, since the wrong one can make good results look poor or poor results look good. The firm also documented the reasons for its benchmark choice in its investment policy statement, so that future boards would not change the yardstick simply because another index looked more flattering.
Watch out
Common mistakes.
- Comparing a portfolio to the wrong index. The benchmark should match the types of companies and markets the portfolio invests in.
- Assuming the index tracks only US companies. It includes many foreign companies listed on the NYSE.
- Treating the index level as a price you can pay. It is a calculated number, and you need a fund or futures contract to gain exposure.
Questions
People also ask.
How many companies are in the NYSE Composite Index?
It includes all common stocks listed on the exchange, so the number changes as companies list and delist.
How is it different from the Dow?
The Dow has 30 companies and is price-weighted, while the Composite includes all listed stocks and is weighted by free-float market value.
What is a divisor?
It is a number used to scale the total market value to an index level and adjusted for events that would otherwise distort the index.
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