What is a Stock Index?

Overview

A stock market index (or simply stock index) is a group of specially selected stocks used to measure a cross section of the stock market. An index is typically a weighted average of this group of stocks. Indexes are used as a tool by investors to describe market trends and to compare stock price movements. Indexes allow investors to determine if an individual stock is out-performing or under-performing compared to the average.

These indexes are a mathematical tool used by those in the industry, but is not a mutual fund that you can directly invest in.

Stock Indexes can bisect the stock market in different ways in order to measure different parts of the market. Indexes can measure an industry like Technology or Pharmaceuticals, a nation, or other characteristic on which stocks can be grouped. There are some specialized ethical investment induces that measure the growth of securities that meet certain ecological or social metrics.

Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA) is a stock index that measures 30 "trusted" stocks on the New York Stock Exchange (NYSE). The companies in this index change over time. These companies are specially selected in order to represent a broad cross-section of the US economy.

The Dow Jones can be used as a proxy to estimate how the US economy as a whole is doing. This exchange is often referred to as simply "the Dow."

General Electric is the only company that was on the original index that is still there today.

S&P 500

The Standard & Poor's 500 (abbreviated as the S&P 500 or just the "S&P"), is a index of the 500 largest stocks (based on market capitalization) listed on the New York Stock Exchange (NYSE) and the NASDAQ. Like the Dow Jones, the S&P is designed to measure the overall US economy.

Nasdaq Composite Index

The NASDAQ Composite is another widely used stock index in the United States. The NASDAQ composite is heavily weighted towards high tech stocks, just as the NASDAQ in general is mostly made up of technology stocks. The NASDAQ Composite is the third most popular index after the Dow and the S&P 500.

Wrap up

We listed three of the largest and mostly widely used stock indexes above. Even if you did not know what these indexes were before reading this article you had probably heard of them. Stock indexes are designed to measure a certain cross-section of the stock market, or in some cases to reflect a nation's economy as a whole. Although you cannot invest directly in a stock index, there are Electronic Trade Funds (ETFs) that track their performance. You can invest directly in these ETFs or similar mutual funds.

It is important for serious investors to have a pulse on these indexes before jumping into the market.