Stock index explained
A stock index is a collection of stocks that have been selected by the people who created the index. You can think of it as a measure or representation of what’s going on with the economy in general. For example, if a company does well and makes a lot of money, they might be included in an index like this. So when there are more companies doing well and making more money, then you’ll see that reflected in the stock market or in indexes like this one.
An index or share index is a measure of the price movement in stocks over time. They are usually categorized to form the appropriate shade for analysis. For example, an equity market’s general trend can be judged by its stock index (PPI). There are both broad and narrow industry indexes that encompass specific sectors of the economy.
There are three major stock indexes frequently published, S&P 500 (the most followed), Dow Jones Industrial Average (DJIA) which covers only 30 stocks; and Nasdaq Composite Index which tracks 8,000 securities. An index fund is one investment vehicle used to track these indexes passively by owning “a basket” of standardized securities like stocks or bonds like companies within an index represent.
A stock index is a compilation of stocks representing a certain portion of the market or economy. Indexes are used to measure the performance of a section of the market, and some investors use them as a way to benchmark their own portfolios. There are three major stock indexes in the world: the S&P 500, the Nasdaq, and the Dow Jones Industrial Average. The S&P 500 is made up of 500 large American companies, the Nasdaq includes over 3,000 technology and biotechnology companies, and the Dow Jones Industrial Average tracks 30 large American companies. The main difference between these indexes is their size and scope: The S&P 500 tracks bigger companies while the Nasdaq focuses on tech stocks, and the Dow Jones Industrial Average covers a broader range of industries than the other two indexes.
An index is a wholly representative portfolio that has been traded in the market for a certain period of time. It determines how well an individual company or industry performs in comparison to another by tracking the changes in prices and, therefore, in valuations. This allows investors to choose a broader spectrum of investments based on their risk tolerance and objectives.
It is not required to trade on certain exchanges in order to be considered an index. Most stock indexes are designed by groups of specialists. The 3 major stock indexes in the world are S&P 500 (Nasdaq, Dow Jones) and FTSE (London).
The following companies make up the major U.S. indices: Apple Inc., Microsoft Corp., International Business Machines Corp., Bank of America Corp., Exxon Mobil Corp, Facebook Inc, eBay Inc etc. These stocks represent 30 percent of total market capitalization for both Dow Jones Industrial Average and S&P 500 indices while they represent 45 percent for Nasdaq composite index due to that its list includes many technology related stocks such as Alphabet’s Google and Amazon stocks that have high values.
The S&P 500 is made up of the top 500 publicly traded and domiciled companies in the United States. The Nasdaq Composite Index includes stocks listed on 7 world exchanges: New York, Boston, Chicago, San Francisco, Toronto, Mexico City and Johannesburg. The Nasdaq Composite Index also includes U.S.-based value-weighted aggregates that apply a factor to market capitalization to put more weight on high-cost issuers from developing markets such as Taiwan and China.
The S&P 500 is composed of 500 stocks from various industries, while the Dow Jones Industrial Average (DJIA) contains 30 stocks from only blue-chip companies. The DJIA is often considered a better indicator of the overall market than the S&P 500 because it is more diversified.