An index is a selection of securities that help provide a glimpse into the broader market. For example, its calculation is based on prices of a collection of similar stocks; this helps give a general idea of how the market is performing in this particular market or segment. When you hear the market is up 100 points – they are referring to an index. Keep in mind there are many U.S. indices, below are a few major indices:
Dow Jones Industrial Average (DJIA) – is the oldest and most renowned index. It is an index of 30 “Blue Chip” stocks of U.S. industrial companies, which includes a broad range of companies. These stocks are heavily traded and represent a majority of market volume which may provide a good indicator of the entire market. However, the DJIA is not a weighted index and does not factor in market capitalization.
S&P 500 Composite Stock Price Index – is a capitalization- weighted index of 500 widely held stocks, these stocks account for 70% of the entire market and are a sample of leading industries within the U.S. Economy. Stocks are chosen for market size, liquidity, and industry group representation. Many financial professionals use the S&P 500’s performance as a benchmark.
Nasdaq Composite Index – is a market-capitalization-weighted index of all stocks traded on the Nasdaq. It is known for its significant portion of technology stocks but also incorporates financial, industrial, insurance, etc. stocks and includes speculative companies with small market capitalizations.
The above indices are only a few of the thousands of market indices. There are indices for every credible sector of the economy, investment style, different asset classes and market capitalization size. Indices are typically related by some commonality, and each index has a particular focus to provide highly specific or very general information. This tool is used by investors and financial managers to describe the market and compare the return on specific investments. The SEC does not regulate the content of these indices so go to Morningstar’s website, Nasdaq website , or Standard & Poor’s website for details. Contact your trusted financial advisor and discuss how they use indices to create benchmarks for investment measurement or read the Wall Street Journal!.
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