Stock Market Index: Measuring Performance

Stock Market Indexes
Stock Market Indexes
Stock Market Indexes

An index that tracks stock market performance shows investors what they think about the economy. An index is made up of data from different companies across industries. These data are combined to create a picture which allows investors to compare the current and historical prices to calculate market performance.

Some indexes concentrate on a specific market segment. For example, the Nasdaq stockindex closely follows the technology sector. You can see the Nasdaq stock index to get a sense of how technology companies are performing.

Also, indexes come in a variety of sizes. Some only track a handful stocks while others monitor thousands. Each index serves a distinct purpose as different investors have different interests in different sectors.

There are less-known stock indexes

There are many more than the famous stock market indicators. You will find indexes that show the stock performance in a country or those that do business in a certain section of the economy. Some indexes are able to distinguish large, small and mid-sized businesses into distinct categories. Others choose components stocks using investing strategies like dividend investing, value investing, and growth investing. There is an index for almost every stock. A proliferation of indexes has been created to aid fund managers to use passive investment strategies to minimize cost and allow investors to tailor portfolio exposure.

Nasdaq 100 The Nasdaq 100 index is another index of Nasdaq stock-listed stocks. This narrower index focuses on 100 stocks (roughly, the top 3%) and excludes financial companies. This index provides a way to track performance of largecap stocks. It focuses on technology.
The Russell 2000 – This one was mentioned above but it’s well worth looking into. The Russell 2000 index is a collection of 2,000 small companies. This index is widely respected as the best way to gauge how small U.S. corporations are doing. The Russell 2000 has a median stock market cap of $1.15billion. Half the stocks are smaller. While small-cap stocks can be volatile, they are also more stable than their larger counterparts. However, they have a tendency to outperform larger stocks long-term. Over shorter time periods, small-cap stocks can perform very differently from large-cap stocks.
Russell 3000 If the Russell 3000 is your choice for a “total market” index, it’s the right one. The Russell 2000 is combined with the Russell 1000 to form the index, which includes the largest 1,000 stocks in market. Russell 3000 and its funds are intended to give exposure to the entire U.S. Stock Market. This includes the large and volatile companies as well as the small-caps.
Indexes according to Stock Types
S&P 500 Value Index S&P 500 Value Index comprises stocks in S&P 500 deemed to have “value attributes”. These stocks generally trade at low multiples of earnings and book values. They tend to be older and slower-growing. Some of the largest stocks in this index include JPMorgan Chase (NYSE:JPM), Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), AT&T (NYSE:T), and ExxonMobil (NYSE:XOM).
S&P 500 Growth Index – This S&P 500 Growth Index includes stocks from the S&P 500 that have been considered to possess “growth characteristics”. Although there are no clear cutoffs to differentiate growth stocks, they are generally companies with above average sales growth and trade at relatively high profit-to-earnings ratios. S&P 500 Growth Index stocks that are the largest include Apple (NASDAQ,AAPL), Amazon (NASDAQ.AMZN), Facebook(NASDAQ.FB) and Visa.

Indexes according to Market Capitalization

The S&P 500 technically is a component of a total-market indicator known as the S&P 150. The S&P 500 comprises the large-cap section, but there are other segments.

S&P MidCap 40 – This indicator tracks the middle of market. Investors see mid-cap stocks as a great compromise between low volatility levels and high long-term potential return.
S&P SmallCap 60 – This is an index that tracks 600 small-cap companies. However, the Russell 2000 Index for small caps is much more widely used.
How do I read a stock-market index?

It is important to look at how an index value changes over the time in order to correctly read it. All new stock market indicators start with a fixed value, based upon the stock prices at their beginning date. The future index value will be a measure of rising and declining prices for these component stocks.

Different stock market indexes may use different starting values. However, measuring changes using points can be misleading. One index might rise 250 points in one day, but another may rise only 10 points. This could make it appear that the first index has performed better. But, if the index that started the day was at 25,000, and the index that ended the day was at 250 then the percentage gains for second index were much higher. A greater percentage gain is a better way to make more profit when you invest in funds which track the index.

Even the most well-known stock market indexes may not measure the overall performance of the market. The index can show you which stocks are included and which are not. This information can be used to help explain why other indexes might not perform in the same manner.

What are the main purposes of stock exchange indexes?

You can use stock market indicators to help you follow for several key reasons. It is possible to get an overall sense of the health of your stock market by tracking the most closely followed stock market indicators. It is possible to track lesser-known indicators and see how the market performs relative to the entire market. If you don’t want to invest directly in stocks, but simply want to track the performance of the entire market, investing in index funds is a cost-effective and efficient way to generate solid returns over the long term. Stock market indicators make it easy to understand how the market is performing, without having each stock follow its ups and downs. They provide simple investment opportunities for novice investors to take part in the long-term success that the stock markets enjoy.

Weighted indexes

Each stock in an indicator has a weighting. Stocks with higher weightings are more influential on an index’s movements. There are three main ways that indexes assign weightings for their stocks.

High stock price indexes are more heavily weighted. A hypothetical index would consist of three stocks that have share prices of $20, $10, and $70. The $70 stock would be 70% of the total index, regardless the company’s relative size. The Dow Jones Industrials represents the best example of price-weighted indices.
Market-capitalization-weighted indexes give more weight to companies with higher market capitalizations. The S&P 500 and Nasdaq Composite both have market-cap weightings. Large companies, such as Apple or Microsoft( NASDAQ.MSFT), get greater weightings that the smaller companies making up the indexes.
Equal-weight Indexes give equal weighting to each stock, regardless price and market cap.

Stock market indexes may also use proprietary methods for calculating weightings. Some indexes assign weightings depending on how much a stock pays in dividends. The majority of market-cap weighted indexes, however, are the most widespread, because they’re the easiest for Index Fund track.

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