A stock market indicator shows investors how an economy is performing. An index draws data from companies across a range of industries. The data from all these companies creates an overall picture that helps investors compare price levels and previous prices to calculate market performance.
Some indexes target a smaller market. The Nasdaq stock Index closely tracks tech sector. You should look at the Nasdaq to find out how technology companies are performing.
Different sizes of indexes are also available. Some may track just a few stocks while others might monitor thousands. Each index serves an individual purpose because investors are keen to invest in different industries.
Indexes that are not as well-known as the stock market
There are thousands more indexes than these stock market-related indexes. You can find an index that reflects the performance of stocks within a certain country, or that does business in a specific area of the economy. Some indexes divide large, mid-sized and small companies into different types. Others employ investing strategies like value, growth, or dividend investing in order to select the component stocks. There are indexes for just about any stock. To help fund managers use passive investments strategies to minimize costs, and to allow investors to tailor their portfolio exposure, the rise of index mutual funds has seen an explosion of ETFs and indexes.
Nasdaq 100 A narrower index which tracks Nasdaq’s listed stocks, the Nasdaq 100 excludes financial corporations. This index allows you to track the performance large-cap stocks. There is a focus on technology.
Russell2000 – Though we’ve already discussed this one, it’s worthwhile to take a deeper look. The Russell 2000 index, made up of 2,000 smaller-cap companies and widely considered the best indicator of U.S. company size, is widely regarded. The Russell 2000 stock index contains 2,000 stocks. Their median market cap is just $1.15 million, which means half of the stocks are smaller. However, smaller stocks have a higher volatility than larger ones, and they perform better over the long term than larger stocks. Small-cap stocks can be more successful over shorter time frames than large caps.
Russell 3000 This is the Russell 3000, which you can use to find a total stock market index. The Russell 2000, Russell 1000 and Russell 1000 combine to create this index. It includes the largest 1,000 stocks of the market. Russell 3000 and the Russell 1000 funds that track it is designed to offer exposure to the entire U.S. market.
Indexes according Types of Stock
S&P 500 Value Index S&P 500 Value Index contains stocks from the S&P 500 with “value characteristics”. These stocks typically trade at relatively low multiples (or even minus) of their book and earnings values. They are also more mature 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 – Stocks in the S&P 500 deemed to have “growth attributes” make up S&P 500 Growth Index. There are no set criteria for distinguishing growth stocks. However, these stocks are generally those with above-average revenue growth and high price to earnings ratios. S&P 500 Growth Index has some of the largest stocks like Apple (NASDAQ.AAPL), Amazon.com (NASDAQ.AMZN), Facebook.com (NASDAQ.FB), and Visa.
Indexes calculated by Market Capitalization
Technically, S&P 500 refers to a segment of a total index known as S&P 1500. The S&P 500 includes large-cap stocks, but other segments include:
S&P MidCap400 This index tracks market middle. Mid-cap stocks are often viewed as an attractive compromise between low volatility (and high long-term return potential) for investors.
S&P SmallCap600Â Although this index tracks 600 small cap companies, the Russell 2000 is a more widely-used index for small caps.
How do stock market indexes work?
In order to properly read an index, it is necessary that you examine the change in index value over time. Every new stock market index starts with a fixed amount based only on the stock prices at its start date. The future index values then measure rising or falling stock prices for those components.
Stock market indexes don’t all use the exact same starting value. However it is possible to misinterpret how points are used to measure index changes. A day in which one index increases 250 points and the other only 10 points can make it seem like the first index performed better. You can see that percentage terms the gains for both indexes were greater if they started the day at 250 and 25,000 respectively. If you invest into funds that track the index’s performance, you will see a higher percentage of profit. Therefore, it’s better not to focus on point movements but on percentages.
However, even the most popular stock exchange indexes can’t measure the entire performance of the market. Knowing which stocks make up an index will tell you which part of the stock market is contributing to the index’s performance. It also can help you understand why indexes might be not performing in the same way.
What are the potential uses of stock indexes in the stock market?
There are a few key reasons why stock market indexes might be of value to you:
A general overview of the health and performance of the stock exchange can be obtained by monitoring the most-followed indexes.
By tracking lesser-known indices, you can see how a segment of the market is doing relative to the market overall.
If you don’t wish to invest individually in stocks, but instead simply want to match performance of the whole market, then investing in index fund funds that track the stock indexes you’re interested in is a cost effective way to achieve solid returns over time.
Stock market benchmarks can be used to help you see the overall performance of the market, without the need to follow every stock’s ups or downs. They offer easy investment opportunities that even novice investors could use to contribute to the long-term viability of the stock exchange.
Weighted Indices
Each stock is assigned a weighting in an index. Stocks that have higher weightings can have greater impact on the index’s movements. There are three possible ways that indexes assign weightings on their stocks.
Companies with higher stock prices receive more weight in Price-weighted Indexes . For example, if there was an index with three stocks at $70, $20, or $10 share prices, the $70 Stock would account for 70% of the total index. This is regardless of how large the company. The Dow Jones Industrials index is the most well-known price-weighted.
Market-capitalization-weighted indexes give more weight to companies with higher market capitalizations. Market-cap weightings in both the S&P 500 (NASDAQ:MSFT and the Nasdaq Composite) are greater for large companies like Apple and Microsoft.
The Equal Weight Indexes apply the same weightings to each stock regardless of price, capitalization or another factor.
Other stock market indicators use proprietary methods to calculate weightings. Some indexes assign weightings to stocks based on the dividends they pay out. However, the majority of market-cap-weighted, index funds are the most prevalent. They’re also the easiest to track.
