A stock market index is used by traders and investors to introduce a complete stock market and to follow the market changes over time. It is the system that measures the value of a share of the stock market. A Market Index is computed by adding the price of the selected stocks. Understanding how indexes are decided and knowing their differences will help you easily realize the daily movements in the marketplace.
Market indexes are classified in many ways. “Global” stock market indexes usually include large companies no matter where they are created or traded; a good example of a global index is the S&P Global 100.
The most frequently quoted indexes are “national” stock market indexes. They show the performance of the stock market of the given nation through the stocks of large companies listed on the nation’s largest stock exchanges such as the American S&P 500 and the Japanese Nikkei 225.
The original total market index, The Wilshire 5000 Index, typically represents the stocks of almost every openly traded company in the United States. It involves all the U.S. stocks that have been traded on the New York Stock Exchange, Nasdaq and American Stock Exchange.
Another popular index, The Dow Jones Industrial Average (DJIA), is the one of the most well-known and often used indexes. If you ask an investor how the market is, you will likely get the answer that it is based on the DJIA. The DJIA is known as a price weighted index. Dow Jones Industrial Index includes the stocks of 30 large and powerful companies. The index is called an average as it was originally created by adding up the per-share price of the stocks of companies in the index and dividing this sum by the number of companies. Now it is not so easy to calculate. Through the years stock splits, spin-offs and similar events changed the divisor, making it a relatively small number.
One of the large indexes is the Standard and Poor's 500. The S&P 500 is a larger and more varied index than the DJIA. It includes 500 of the most widely traded stocks in the U.S. and represents almost 70% of the value of the U.S. stock market. Commonly, the S&P 500 gives a good direction of the U.S. marketplace as a whole.
The S&P 500 index is market weighted; this is the reason that if the total market value of all 500 companies in the S&P 500 drops by 10%, the value of the index also drops by 10%. Unlike the S&P 500, a 10% movement in all stocks in the DJIA would not necessarily cause a 10% change in the index.
The S&P 500 index includes different kinds of companies, including energy, industrials, information technology, healthcare, financials and consumer staples.
The Nasdaq Composite Index is the exchange where technology stocks are traded. This index has 5000 companies. Some of those companies are not based in the U.S. Besides technology stocks, Nasdaq also includes financial, indusrtial stocks and srocks from industrial and transportation industries.Unlike the DJIA, the S&P 500 Nasdaq composite includes many companies that have small capitalization. It also has several large and small firms.
Knowing what is happening in the international markets is good. If you are intending to follow one index or market, the S&P 500 is a good choice because it can give you a good overall idea of the direction in the U.S. market. So now understanding what the stock market index is it is time to act. Just find the index relevant to your requirements and see how well you are going.