What is a Stock Market Index?

Have you ever wondered what all of those numbers on the nightly business report actually mean? Michael Fischer explains:


What is a stock market index? (3:44)

 

Just as you cannot accurately gauge the health of a garden from the growth of a single plant, you cannot gauge the health of the market from the performance of s single stock. Stock market indexes — or indices, if you prefer — allows us to track groups of stocks instead of simply following individual stocks.

Dow Jones Industrial Average (DJIA)
On 26 May 1896, Charles H. Dow introduced his method of gauging market health, which was simply to take the average price of twelve specific stocks. Now, more than one hundred years later, the DJIA is a little more complex. According to the official web site, since 1928 the index has comprised 30 blue chip stocks, as selected by the editors of The Wall Street Journal. The average share price of these stocks is divided by a special number meant to reduce “distortions” from non-essential factors. The Investopedia has more on how the Dow Jones Industrial Average is calculated.

Standard & Poor's 500 Index (S&P 500)
The 500 companies that make up the S&P 500 are meant to reflect the largest American corporations. The index was introduced on 04 March 1957, and was one of the first (the first?) computerized stock index. The companies in the S&P 500 are selected by a committee, and then each stock is weighted according to the company's market value. Though the DJIA is more well-known, the S&P 500 is a more accurate representation of actual market performance.

Other Indexes
There are tons of stock market indexes, not just in the United States, but around the world. The wikipedia entry on the subject lists many of them. Some of the more well-known include:

There are also smaller indexes meant to represent sections of the market, such as utilities, or transportation, or technology.

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BxCapricorn
BxCapricorn
13 years ago

The Dow The grand-daddy of them all. If you ask an investor how “the market” is doing, they’ll probably tell you about “the Dow”. This index is formally called the Dow Jones Industrial Average (DJIA) and it is the most well-known and most frequently used index in the world. This index is comprised of 30 of the world’s largest and most influential companies. The 30 stocks that make up “the Dow” change periodically, and if you were to take the stock price of all 30 current stocks, and add them up, you would not wind up with the 12,500 point… Read more »

Nu
Nu
13 years ago

There is no explicit international representation here Of course large Large US companies have international exposure, but I count that as secondary exposure.

I suggest the EAFE Stock Index. Its tracked by Morgan Stanley Capital International, Inc. (MSCI), and is used as the “default” indexed international fund for Vanguard —
Vanguard Developed Markets Index Fund (VDMIX)
. The United States Government also provides this index fund as part of its retirement options. Fidelity has a similar tracking fund: FSIIX.

Warren Buffett
Warren Buffett
13 years ago

Buy a diversified portfolio of stocks versus an index. It’s a lot more fun and if you do your homework, you’ll beat the S&P index.

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