A base value of 10 was chosen for the average value of the S&P
index from 1941 to 1943 so that when the index was first published in
1957, the average price of a share of stock (which stood between $45
and $50) was approximately equal to the value of the index. An in-
vestor at that time could easily identify with the changes in the S&P
500 Index since a 1-point change approximated the price change for an
average stock.
The S&P 500 Index does not contain the 500 largest stocks, nor are
all the stocks in the index U.S.-based corporations. For example, Warren
Buffett’s Berkshire Hathaway, which S&P considers a holding company,
is not in the S&P 500 Index. On the other hand, the S&P 500 Index has a
few firms that are quite small, representing companies that have fallen
in value and have yet to be replaced. As of March 2007, the total value of
all S&P 500 companies was about $12.7 trillion, but this constituted less
than 75 percent of the value of all stocks traded in the United States, sig-
nificantly less than 50 years ago when the index comprised almost 90
percent of the market. A history of the S&P 500 Index and the insights
that come from analyzing these stocks in this world-famous index is de-
scribed in the next chapter.Nasdaq Index
On February 8, 1971, the method of trading stocks underwent a revolu-
tionary change. On that date, an automated quotation system called the
Nasdaq(for National Association of Securities Dealers Automated Quota-
tions) provided up-to-date bid and asked prices on 2,400 leading “over-
the-counter” (OTC) stocks. Formerly, quotations for these unlisted stocks
were submitted by the principal trader or by brokerage houses that car-
ried an inventory. The Nasdaq linked the terminals of more than 500 mar-
ket makers nationwide to a centralized computer system.
In contrast to the Nasdaq, stocks traded on the New York or Amer-
ican Stock Exchanges are assigned to a single specialist, who is charged
with maintaining an orderly market in that stock. The Nasdaq changed
the way quotes were disseminated and made trading these issues far
more attractive to both investors and traders.
At the time that the Nasdaq was created, it was clearly more presti-
gious to be listed with an exchange (and preferably the New York Stock
Exchange) than be traded on the Nasdaq. Nasdaq stocks tended to be
small or new firms that had recently gone public or did not meet the list-
ing requirements of the larger exchanges. However, many young tech-
nology firms found the computerized Nasdaq system a natural home.CHAPTER 3 Stock Indexes 43