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.
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:
- London's FTSE 100
- France's CAC 40
- Germany's DAX 30
- Japan's Nikkei 225
- The MCSI EAFA, which is an index of non-North American stocks
- The Wilshire 5000 is meant to measure the entire U.S. stock market.
There are also smaller indexes meant to represent sections of the market, such as utilities, or transportation, or technology.