Stock Indexes

Stock indexes are a statistical average of a particular stock exchange or sector. Indexes are composed of stocks which have something in common they are all part of the same exchange; they are part of the same industry; or they represent companies of a certain size or location.

There are many different stock indexes, the most common in the United States being the Dow Jones Industrial Average, the NYSE Composite index, and the S&P 500 Composite Stock Price Index. Stock indexes give an overall perspective about the economic health of a particular industry or stock exchange.

There are several different ways to calculate indexes. An index based solely on the price of stocks is called a 'price weighted index'. This type of index does not take into consideration the importance of any particular stock or the size of the company. An index which 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. Another type of index is the 'market-share weighted' index. This type of index is based on the number of shares rather than their total value.

Index Funds

As well as giving an overall grade to a particular economy, indexes can also be an investment instrument. Mutual funds based on indexes are known as 'passively managed mutual funds' and have been shown to consistently outperform managed funds. 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 on to the investor who participates in these funds.

The Big Indexes

The Dow Jones Industrial Average is one of the best-known indexes in the United States. It follows the stock movements of 30 of the most influential companies in America including General Electric, Coca Cola and General Motors. It is a 'price-weighted average' index thus giving more influence to more expensive stocks. Some analysts feel that the price-weighting does not give an accurate picture of stock market movements and that 30 companies are not enough to form an accurate assessment.

The S&P 500 Index is based on 500 United States corporations. These companies are carefully chosen to represent a broad slice of economic activity. 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. This is based on 100 of the largest companies listed on the London Stock Exchange. It is an indicator of the British economy and is one of the biggest indexes in Europe. Other important non-US indexes are the CAC 40 from France and the Nikkei 225 from Japan.


Bull Bear Markets
Bull and Bear are the terms to describe the general conditions of the stock market. These do not refer to s...
bull-bear-markets.php

Fundamental Analysis
The goal of fundamental analysis is to determine h...
fundamental-analysis.php

Fundamental Analysis 2
Earnings per ShareThe overall earnings of a company is not ...
fundamental-analysis-2.php

Getting Started
Most stock trades are done through a broker an intermediary who takes orders and executes them. Brokers can a...
getting-started.php

Penny Stocks
All of these factors low price, lack of standards, and lac...
penny-stocks.php

Pink Sheets Stocks
Penny stocks are securities that are less...
pink-sheets-stocks.php

Resources428
...
resources428.php

Stock Brokers
These perks are not free full service brokers charge the highest commission rates in th...
stock-brokers.php

Stock Markets
The 'Stock Exchange' is the correct term for the physical location for tradi...
stock-markets.php

Stock Options
A contract to buy is called a 'call option'. The buyer of a call option hopes the price of the under...
stock-options.php

Stock Prices
To a certain extent stock prices are determined by investor confidenc...
stock-prices.php

Stock Splits
Why would a company do this?...
stock-splits.php

Stocks Trading Signals
Investors who treat trading as a full-time job have the time to...
stocks-trading-signals.php

Stocks Vs Bonds
Bonds always carry the risk that the principal amount may not be paid back. Companies with h...
stocks-vs-bonds.php

Stocks Vs Mutual Funds
What is the advantage of a diversified portfolio? It offers protection against rapid market losses of any one pa...
stocks-vs-mutual-funds.php

Stock Trading Strategies
HedgingHedging is a way of protecting an investment by reducing th...
stock-trading-strategies.php

Technical Analysis
The basis for technical analysis is the belief that stock prices move in predictable patterns. ...
technical-analysis.php

Technical Analysis 2
Patterns...
technical-analysis-2.php

Types Of Trading
The stock market also provides opportunities for short-term investor...
types-of-trading.php

 

Google

Site Menu

 

More Articles