What is a Stock Market Index?
In the stock market world, you need a quick way to compare the movement of the market, up and down, from day to day, from month to month or from year to year. An index is just a benchmark or yardstick expressed as a single number that makes it possible to do such comparing. How are indexes calculated? Index calculation is a very interesting topic, because indexes are calculated in different ways. It is important for investors to understand the calculation methods involved for the indexes they refer to, because the calculation method has a profound impact on results. In simple terms, we want to know what is being measured. Most stock indexes give more weight to larger companies. These indexes are referred to as capitalization-weighted (capitalization is simply the total market value of the outstanding shares of a company’s stock). Since larger companies are weighted more heavily in these indexes, the index is not a valid indicator of the price of the average stock in the index. However,
Stock trading and financial investment in the stock market is serious business. Anyone with significant financial assets tied to the world’s stock markets will often pay particular attention to a specific stock market index. A stock market index is the delineation of the relative value of stocks that make up a particular market sector such as heavy industry, technology, telecommunications, healthcare, etc. An index of any sort is, essentially, an aggregate. A stock market index is, therefore, composed of the combined performance of a certain aggregate of individual publicly-traded company stocks best representing that specific sector of the market. The sector could be composed of hundreds of different publicly traded companies, or as few as thirty or so Standard and Poor’s 500 Index (S&P 500), which tracks large- and mid-cap U.S. stocks, is one of the better-known examples of a stock market index. Perhaps the most widely quoted stock index is the Dow Jones Index, which measures the per
In the stock market world, you need a way to compare the movement of the market, up and down, from day to day, and from year to year. An index is just a benchmark or yardstick expressed as a number that makes it possible to do this comparison. The S&P 500 and the NASDAQ (which we’ll look at in a moment), each began at an arbitrary 100. The Dow hit 100 in 1906. The Dow index used a simple averaging method, while other indexes take the total market value of the stocks that the index represents, and then adjusts the index up or down for the net change in market value.
