Stock market index
Stock market indexes measure how shares in a group of companies are performing. They give investors an at-a-glance look at the state of the economy.
Indexes can track stocks in a variety of ways. Some only focus on corporations of a certain size, while others specialize on monitoring movements in the stocks of businesses within a particular industry.
Examples of stock market indexes
If you’ve ever tuned into a financial report on the news, you may see journalists quote certain stock indexes in particular. Some of the best-known examples include:
· S&P 500: an index that is based on the market capitalizations of the 500 biggest corporations in the US
· Dow Jones Industrial Average: an index tracking 30 large corporations that trade on the New York Stock Exchange or the NASDAQ
· FTSE 100: an index measuring the 100 biggest public companies on the London Stock Exchange – Europe’s answer to the S&P 500
How indexes are calculated
When you’re looking at the figures associated with stock market indexes – random numbers like 21,648.21 or 7,462.56 – it can be difficult to know what this represents. By and large, indexes have a starting figure of 1,000. As such, a current level of 6,000 would signify that the value of companies is six times greater than it was when the index first launched.
Of course, this measurement may not prove useful for investors who simply want to know how things have changed over the course of a week, month or year. As a result, percentages are used to gauge short-term movements in an index – hence why business reporters will mention how “the S&P is up 5% on the day.”
Although it isn’t possible to invest in a stock market index directly, index funds aim to replicate the composition of some of the best-known indexes. That way, investors can be exposed to each of the companies measured without having to own shares in hundreds of corporations themselves.