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Stock Index: Definition and Function

Trader, have you ever heard of Stock Market Indices? Read the simple way to trade stocks.

Or do any of you have a long-standing relationship with the Index of various kinds? This time we will discuss about indexes as part of the Finex Glossary. Let’s see the explanation below!

Stock Market Index Definition

Market index tracks the performance of a particular group of stocks, bonds, or other investments. These investments are often grouped within a specific industry, such as stocks of technology companies, or perhaps the stock market as a whole as is the case with the S&P 500, Dow Jones Industrial Average (DJIA) or Nasdaq.

The index measures the value of an ownership portfolio with certain market characteristics. Each index has its own methodology which is calculated and maintained by the index provider. The index methodology will usually be weighted by price or market capitalization.

Indexes have their roots in the investment management business where flows of funds use them as a benchmark for comparison of performance and investment managers use them as a basis for creating investable index funds.

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There is no specific measure for a market index. The DJIA contains 30 stocks, while the CRSP index has more than 3,700.

Most important thing is that each index contains a large enough sample size to represent the behavior of the overall economic sector they wish to express.

Why is the Index Important?

Many investors use market indexes to manage their investment portfolios and to keep up with updates around financial markets.

Indexes give investors a simple overview of a large market sector, without having to examine each asset individually. For casual investors, of course, it is not practical to study hundreds of different stock prices to understand the changing fortunes of companies in technology. Indexes such as the NASDAQ-100 Technology Sector Index can show the average trend for the sector.

The daily yield of stock market indexes is perhaps the most popular and significant number in the world of investment and finance. The Dow Jones Industrial Average (DJIA) which comprises the 30 largest traded companies in the United States is perhaps the best-known and most widely used stock market index.

Types of Index

Apart from stock market indexes, there are many indexes some of which are designed to represent very specific market segments, namely:

Environmental, Social, and Governance

The environmental, social, and governance (ESG) index focuses on companies that score well as measured by how they treat the environment, employees, management, and society.

Global Index

As the name implies, the global index allows you to track the collective performance of all the companies in the world.

National Index

Just as the major stock market indexes track the performance of the United States market, there are indexes that follow the ups and downs of companies in almost every country.

Growth Index

The growth index tracks the growth performance of leading stocks or stocks of companies that are targeting faster growth than the market as a whole.

Value Index

The value index groups companies that are considered undervalued by investors based on their financial condition.

Sector Index

Sector indexes are created to track the performance of specific industries, such as technology, finance, healthcare, consumer goods, and transportation.

Major Stock Market Indexes

There are thousands of indexes in the investment world. Here are the most common indexes you may come across:

S&P 500 Index

One of the best-known indexes, the S&P 500 tracks the performance of the top 500 companies in the US, as determined by a committee at the S&P Dow Jones Indices. The S&P 500 is an index that counts as a market-capitalization-weighted index.

The Dow Jones Industrial Average (DJIA)

Scope of the DJIA is relatively small, as it only tracks the performance of 30 US companies selected by the S&P Dow Jones Indices. Shares in DJIA come from a variety of industries, from healthcare to technology, but are united under the blue-chip stock umbrella, meaning they have a strong history of financial performance. The DJIA is one of the few price-weighted market indexes.

The Nasdaq 100

Nasdaq 100 tracks the performance of the 100 largest and most actively traded stocks listed on the Nasdaq stock exchange. The companies on the Nasdaq can come from many different industries, but they are generally tech-oriented and don’t belong in the financial sector. Nasdaq 100 using market-cap weighted.

Investing in Market Indexes

Because it is based on the combined performance tracking data of various companies and various investments, investing funds based on leading indexes is considered the best way for type of investment that is fast, easy and inexpensive.

Index funds and exchange-traded funds (ETFs) provide access to a ready-made diversified portfolio and bonds.

You can also invest in indexes with Finex which provides the opportunity to invest in 7 special indexes such as Nasdaq and Hang Seng just by registering a Pro account.

Start earning profit by opening an account at Finex.

In addition, the Pro account allows you to trade 27 of the most popular Forex currency pairs, 33 stocks of international companies, and beautiful commodities such as WTI crude oil, Gold, and Silver.

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