Indexes

 

Basics

Investors always want to know "what’s happening with the stock market?"  There is no one answer.  But many look to indexes as part of their analysis.  There are various indexes, which are a group of stocks selected, according to certain criteria, to represent a specific portion of the market, industry or asset class.  These are used to give investors a quick snapshot of the performance of the market.  It is like polling.  You can’t poll all the people in the U.S., so you take a representative sample.  It is one way to track the performance of the market or a specific sector.  You can also use indexes to measure the overall health of a sector and use it as a benchmark to compare a specific stock to.  Many of the indexes use market capitalization (see Market Capitalization), which is the size/value of the company.



Originally most indexes were based on an individual stock market or market capitalization.  However, now indexes are created to reflect numerous groups of securities.  These can range from a single country such as India to industry indexes such as railroads, drugs or computers.  Indexes are not restricted to just U.S. companies.  Major international indexes include the DAX (Germany), Hang Seng (Hong Kong), FTSE (U.K.), Nikkei (Japan), and TSX (Canada).

Also there are various index funds (see Index Funds) that individuals can invest in that represents a basket of all the stocks in a particular index.  Below are a few of the major U.S. market indexes that analysts look at to gage the direction of the market.