Benchmarks are used for measuring the performance of stocks, bonds, funds and other business activities against a set standard. They help investors establish whether their portfolio is doing better or worse than the rest of the market, and enable businesses to assess whether their operations are running as efficiently as they should.
Examples of benchmarks
Indexes such as the S&P 500 in the US and the FTSE 100 in London are benchmarks because they provide an overall view of whether large-cap companies have enjoyed growth or suffered contractions in the past trading session, week, month or year. From here, traders can compare their investments with these indexes to determine whether their holdings are outpacing the market in either direction.
A major challenge for investors is finding a benchmark that best reflects their financial interests. If a trader mainly owns stocks in small companies, an index tracking large-cap companies may not offer the point of comparison they’re looking for. Likewise, if an investor has specialized in technology stocks, an index focused on healthcare stocks would be a poor benchmark.
How benchmarks are used
Benchmarks can help investors manage risk when they are refreshing their portfolio, and forecast potential returns based on past performance. By evaluating benchmarks focusing on other risk levels and industries, traders can also discover new opportunities.
For businesses, it is an invaluable way of assessing current performance levels when compared with previous financial years, as well as ascertaining how they measure up against competitors. There are a seemingly endless ways that a company can use benchmarking, ranging from customer satisfaction and manufacturing output to employee morale and overheads. When used correctly, it can be an indispensable tool for finding efficiencies, new business opportunities, and building upon strengths.