The definition of a stock index is a statistical average of a particular stock exhange. An index is basically a group of stocks that have something in common. Perhaps they are all part of the same industry or they represent companies of a certain size or geographic location.
1. Available Stock Indexes
- Dow Jones Industrial Average
- NYSE Composite index
- S&P 500 Composite Stock Price Index
2. Calculating Indexes
A price weighted index is solely based on the price of the stock. It doesnt take into consideration the size of the company. An index that is market value weighted, on the other hand, takes into account the size of the companies. That way, price shifts of small companies have less influence than those of larger companies.
3. Using Stock Indexes To Plan Your Investments
If you base your mutual fund on an index, it will consistently outperform ones that arent. Mutual funds based on an index simply duplicate the holdings where the index is based on. Thus if the Dow Jones rises by 1% the fund based on the Dow Jones also rises by the same amount. This has the advantage of lower costs for research and transactions - savings that can be passed onto you!
4. The Major Players
The Dow Jones Industrial Average is based on the top 30 companies in America and is price weighted. The S&P 500 Index is based on 500 United States corporations. It is second in influence after the Dow Jones and is felt to be an accurate predictor of the state of the United States economy. Outside of the United States the most influential index is the FTSE 100 Index.
5. Types Of Indexes
Stock market indices may be classed in many ways. A broad-base index represents the performance of a whole stock market— and by proxy, reflects investor sentiment on the state of the economy. The most regularly quoted market indices are broad-base indices including the largest listed companies on a nation's largest stock exchange, such as the American Dow Jones Industrial Average and S&P 500 Index, the British FTSE 100, the French CAC 40, the German DAX and the Japanese Nikkei 225.
More specialised indices exist tracking the performance of specific sectors of the market. The Morgan Stanley Biotech Index, for example, consists of 36 American firms in the biotechnology industry. Other indices may track companies of a certain size, a certain type of management, or even more specialized criteria— one index published by Linux Weekly News tracks stocks of companies that sell products and services based on the Linux operating environment.
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