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For international markets, the Financial Times Stock Exchange Index and the Nikkei Index are popular proxies for the British and Japanese stock markets, respectively. Indexes provide investors with a simplified snapshot of a large market sector, without having to examine every single asset in that index.
For example, it would be impractical for an ordinary investor to study hundreds of different stock prices in order to understand the changing fortunes of different technology companies. Market indexes are hypothetical portfolios of investment holdings that investors use as an indicator of market movement.
There are many different types of market indexes. Market indexes are also used to create index funds, allowing investors to buy a basket of securities rather than picking individual stocks. FTSE Russell. Library of Congress. Securities and Exchange Commission. First Trust.
Stock Markets. Index Trading Strategy. Roth IRA. US Markets. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Table of Contents. What Is a Market Index? Understanding a Market Index. Market Indexes as Benchmarks. Index Funds. The Bottom Line. Investing Markets. Key Takeaways Market indexes provide a broad representative portfolio of investment holdings. Methodologies for constructing individual indexes vary but nearly all calculations are based on weighted average mathematics.
Indexes are used as benchmarks to gauge the movement and performance of market segments. Investors use indexes as a basis for portfolio or passive index investing. What Are the Major Stock Indexes? Why Are Indexes Useful to Investors? Stock Index? Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Index Funds: How They Work, Pros and Cons An index fund is a pooled investment vehicle that passively seeks to replicate the returns of some market indexes.
Understanding a Broad-Based Index A broad-based index is designed to reflect the movement of the entire market—one example of a broad-based index is the Dow Jones Industrial Average. Most Popular U. Composite Indexes—A Refresher A composite index is a statistical tool that groups together many different equities or securities.
Composite indexes are intended to provide a relative measure of the performance of the market or a specific market sector over time. In the same way that researchers pull a sample from the population they wish to study, stock indexes pull a sample from the group of stocks they wish to study. Some indexes aim to sample the market at large, while others aim to sample a specific section of the market e.
Different stock indexes are put together in different ways depending on their respective purposes. Because it aims to be an accurate benchmark for the American equity market as a whole, the Wilshire 5, consists of every stock traded on a major U. The Dow Jones U.
Semiconductors Index, on the other hand, includes far fewer stocks, as it only aims to sample and track the semiconductor subsector of the market. Investors, institutions, fund managers, and analysts monitor the performance of stock indexes to understand how the market—or a particular segment of it, like the automobile industry—is doing at any given time. Often, investors and fund managers use indexes as benchmarks against which to compare the performance of their own portfolios.
The news media often treats stock indexes as gauges of market health. Three percent is simply the overall change in value of the index as a whole. Stock indexes include many stocks, but these stocks are not always included in equal amounts.
Most indexes are weighted in some way, meaning that not all component stocks receive the same representation. There are many factors that indexes can be weighted by, the most common of which are market capitalization and share price. In price-weighted indexes, stocks with higher share prices have more influence on index value than stocks with lower share prices. This happens naturally if an index is not weighted by any other factor.
Thus, price fluctuations in Stock C would affect the index price more than price fluctuations in Stocks A or B. Sometimes, the number of shares a company has in circulation can change. This happens most often due to stock splits which increase the number of shares in circulation and stock buybacks which decrease the number of shares in circulation.
When the number of shares in circulation changes, share price changes accordingly. If stocks are split, share price goes down, whereas if stocks are bought back, share price goes up. The Dow Jones Industrial Average, the second-oldest American stock index, is a price-weighted index that uses a divisor of this sort. In capitalization-weighted indexes also known as market value-weighted indexes component companies are weighted according to their market capitalization total market value, or number of shares outstanding multiplied by share price instead of their share price.
This sort of weighting usually makes more sense than price weighting because share price is not always reflective of total market value. In a capitalization-weighted index, on the other hand, company A would have twice the influence of Company B because it is twice as large in terms of market value. The calculations for price-weighted indexes are simpler than the calculations for capitalization-weighted indexes, but both involve the use of a divisor that is prone to change over time.
If companies were never added to or removed from an index based on how well they meet the criteria for inclusion, and if the component companies never had stock buybacks or splits, then the calculation would remain this simple. In the real world, however, things like this happen frequently, and each time they do, the divisor in the calculation is modified to suit the new conditions. The same goes for capitalization-weighted indexes, although these are even more complicated, as component companies are included in different amounts that correspond to their market capitalizations.
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Stock Market Index Meaning A stock market index is. In finance, a stock index, or stock market index, is an index that measures a stock market, or a subset of the stock market, that helps investors compare. A market index is a hypothetical portfolio of investment holdings that represents a segment of the financial market. The calculation of the index value.