While the index in the back of a book shows the reader where he or she can find specific words or phrases, a stock market index provides investors with an overview of the health of the market. Some indexes track the entire stock market, while others focus on a specific portion or segment.
Examples of Indexes
Numerous indexes exist in the United States and around the world. The Standard & Poor's 500 (S&P 500) remains the most recognizable. It indexes 500 American companies with large quantities of stock in the market. Others include the Russell 1000, Russell 2000, NASDAQ Composite, and Dow Jones Industrial Average.
What Do Indexes Accomplish?
The index represents the collective value of the stock it covers. If the average price of the stocks in the index fall, the index falls, as well; conversely, when prices swell, the index goes up.
Most indexes measure their values in points; each day, the index reports how many points it rose or fell. The actual point value matters much less than the degree of change from the previous day. For example, saying, "The Dow Jones fell 500 points yesterday" carries more weight than, "The Dow Jones is at 13,500 points today."
What is an Index Fund?
Although an index itself does not represent the individual stocks, some investors choose to participate in index funds. Unlike traditional securities trading, index funds allow people to purchase stock in an entire index rather than in individual stocks.
Investment terms can seem confusing at first. Keeping track of stock indexes becomes easier when you sign up for Mint and manage your financial life in one place.