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.
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.
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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