Understanding Stock Market Indices
A stock market index is a statistical measure of changes in the stock markets. An index represents a portfolio of market-traded securities that is considered reasonably representative of the market as a whole. Each index has its own calculation method. It is generally expressed as a change from its base value. For a better understanding of the stock market, an index should be read not in its absolute numerical value but in the percentage change in its numerical value. You cannot invest directly in an index. However, you can invest in index-related mutual funds.
Popular indices in the US
The Standard & Poor’s 500 Index – The S & P 500 Index
This index is the most popular index in the world. The S&P 500 Index consists of 500 stocks chosen based on industry, market capitalization, liquidity, and other factors. It is a leading indicator of US stocks. The index does not include speculative stocks.
The Dow Jones Industrial Average (DJIA), popularly known as the Dow
This index consists of 30 major stocks listed on the New York Stock Exchange (NYSE) and the NASDAQ. It includes companies such as Microsoft, Exxon Mobil, Disney, and General Electrical. The index does not include speculative stocks.
The Dow Jones Utility Average (DJUA)
The DJUA is more of a sector index, as it is a price-weighted average of 15 utility stocks that are traded in the U.S. It is sensitive to changes in interest rates, as utility companies tend to ask borrowed a large amount of money.
The Russell 2000 Index
This index consists of 2,000 small business stocks included in the Russell 3000 index. It serves as a benchmark for small business stocks in the US.
Wilshire 5000 Total Market Index (TMWX)
This index measures the stock performance of all US-based stocks for which price data is readily available. It is one of the broadest stock indices. Includes stocks of more than 7,000 companies listed on US stock exchanges.
The Nasdaq Composite Index
Keeps track of companies listed on the Nasdaq stock exchanges. The index consists of stocks from more than 5,000 companies listed on Nasdaq. Most of these companies are technology companies. However, you will find companies in the financial, industrial, transportation and insurance sectors. It also consists of many speculative ventures.
