Stock Market Index: A Complete Beginner's Guide

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When you enter the field of stock investing, there are numerous companies that may pique your interest. But you should remember that not all companies can be found in one same place. The stock market is a huge place, and within it are the stock market indices.

When doing research about the companies you want to invest in, you should remember to note which index it belongs to. That way, you can also do some research on the index itself.

Now, we’ll be discussing what a stock market index is, as well as provide you with the most popular indices available in the stock market.

Stock market charts in a screen

What is a Stock Market Index?

A stock market index is used in measuring the change in the stock prices of the index’s components. You can use the indices to track the performance of the stock market.

Any change in the price of an index is usually equivalent to the change in stocks that are included in the index. More specifically, if an index is up by 1%, that means that the stocks contained in the index have also increased by an average of 1%.

Aside from trading stocks in a company, you can also trade an index by buying and selling it the same way you would an individual share.

Learn more about the different states of the stock market: the bull and bear market.

The 3 Major Stock Market Indices

The Dow

The Dow Jones Industrial Average (DJIA) is one of the oldest and most well-known indices in the world. It is also frequently used by most traders across the globe. It includes the stocks of 30 of the largest and most influential companies in the United States.

The DJIA is a price-weighted index. This means that each stock influences the value of the index in proportion to its price per share. It was originally computed by adding the per-share price of each company stocks and dividing the sum by the number of companies, hence why it’s called average.

This index represents at least a quarter of the entire U.S. stock market value. Despite this, a percent change in the Dow should not immediately be taken as an indication that the entire stock market have fallen by the same percent. The change can be interpreted as the change in the investors’ expectations of the earnings and risks of the large companies included in the average.

Hand navigating the stock market chart on a phone

The S&P500

The Standard & Poor’s 500 Index is larger and offers greater diversity when compared to the DJIA. The index is composed of 500 of the most widely traded stocks in the U.S. All in all, it represents around 80% of the total U.S. stock markets’ value. It is generally a good indicator of movement in the U.S. marketplace as a whole.

The S&P500 is a market weighted index, or sometimes referred to as capilatization-weighted (or cap-weighted). This means that the index’s components weighted according to the total market value of their outstanding shares. With this, all stock in the index is represented in proportion to its total market capitalization.

The Nasdaq Composite Index

Nasdaq is widely known as the index where technology stocks are traded. Some of the companies found on this index are not based in the United States.

Despite it being known mostly for having technology companies, the Nasdaq Composite Index also includes stocks from financial, industrial, insurance, and transportation industries. Large and small firms can also be found in this index. But, unlike the previous two, Nasdaq also contains many speculative companies with small market capitalization.

The movement of this index mostly reflects the performance of the technology industry as well as the attitudes the investors are taking towards the more speculative stocks.

Conclusion

Before you decide to invest in any company, you have to do a proper research to know as much as you can about the company you decide to invest in. most of the information you’ll need to help you in making a decision can be found in the internet. There are many market indices that hold various companies you can choose from. You just have to find the one that will suit you best.

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