What is a ‘Market Index’
A market index is an aggregate value produced by combining several stocks or other investment vehicles together and expressing their total values against a base value from a specific date. Market indexes are intended to represent an entire stock market and thus track the market’s changes over time.
Index values help investors track changes in market values over long periods of time. For example, the widely used Standard and Poor’s 500 Index is computed by combining 500 large-cap U.S. stocks together into one index value. Investors can track changes in the index’s value over time and use it as a benchmark against which to compare their own portfolio returns.
BREAKING DOWN ‘Market Index’
Market indices measure the value of groups of stocks. If an index goes up one level, or 1%, this means a group of stocks has, correspondingly, increased its value by one level as well, thus becoming more attractive to investors. The Dow Jones Industrial Average (DJIA), Nasdaq Composite index and the S&P 500 are examples of market indices.
Well-Known Market Indices
The DJIA measures 30 stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. These companies include premier corporations like General Electric Company, the Walt Disney Company, Exxon Mobil Corporation and Microsoft Corporation. The S&P 500 measures 500 stocks. The Nasdaq Composite index goes further and monitors the daily value of the 4,000 stocks traded on the NASDAQ National Market. Most investors prefer the S&P over the other market indices for its accuracy. Another, the Wilshire 5000, sometimes called the “total market index,” is a lesser known index that keeps on top of all publicly traded companies based in the United States. All four indices measure the daily performance of large companies. The Russell 2000, on the other hand, monitors 2,000 small undifferentiated companies in the market.
The value of the market index is also known as points. As such, when it is said that the DJIA went up 400 points in a day, It means that its value increased from the previous day’s rating to the current day’s rating, hiking the value of its composite companies to 400.
Example of How Indices Help Investors
Indices indicate the financial health of an industry in which an investor has invested. So, if the DJIA drops and keeps on dropping over the course of a month, for example, the investor might conclude that some of its companies are in trouble. If he owns some of these stocks, he might reassess his portfolio and look for other companies in which to invest.