In our everyday life we often hear information on stock indexes. There is no person who hasn’t heard about the Dow Jones Index but there are not that many people who completely understand what these indexes are about and what it means for you personally.
Becoming an investor is a long way and there are many schools and methods of predicting and evaluating the market. Stock Market Indexes are essential on your way. However there are thousands of indexes from major stock market indexes as Dow Jones to Samurai Bond Market, and you always have a wide range of choices of which one you want to look at.
What is a Stock Market Index?
To put it simply, there is a wide range of companies in industries of all kinds. Each index collects data on performance from these companies in order to build a whole picture that would help investors to evaluate and compare ongoing prices with previous prices to calculate the performance of the market. Later in the article we will talk a little bit more about different stock indexes, but for example, if you’re interested in technology you should definitely check the Nasdaq index that evaluates this particular field.
Types of Stock Market Indexes
What are the different stock indexes? There are different ways to classify different indexes: by weight, by coverage, by ethical investing factors. For example, coverage indexes are extremely useful when we talk about a certain country or region, for example, one of the most famous indexes in the world is S&P 500 that tracks the performance of 500 largest companies in the US.
What are the major stock indexes? Four of most popular ones:
Dow Jones Industrial Average (DJI)
Dow Jones Industrial Average is a price-weighted measurement index of 30 most notable companies such as Coca-Cola, Disney, Walmart, McDonalds and Boeing. Since 1896 the list of companies has changed 55 times.
Interesting Fact: General Electric was present in the list from 1896 up to 2018, when it was outrun by pharmaceutical and IT companies.
We hear about the Dow Jones index on a regular basis on the news and it is considered one of the main tools for investors. However, there is some criticism that comes from the fact that companies in the list are assigned based on their stock price, which is called a price-weighted measurement model. Other stock market indexes are weighted using the market capitalization model.
The Nasdaq Index is the second popular index of stocks, which includes not only ordinary shares but also real estate trusts and American depositary receipts. The difference between Nasdaq and Dow Jones is that Nasdaq is market-capitalization weighted and includes not only 30 but more than 2500 stocks. The composition of the index is also more diverse: mostly tech companies but also services and finances. All stock market indexes are valuable for investors not just because they give an idea of today's market but also help to understand the main trends: which industries are becoming leaders and are the most profitable in certain regions or countries.
S&P 500 (INX)
The S&P 500 also has its roots in the American history of the 19th century, just like the Dow, when the “Investors’ Guide to Railroad History” was published by Henry Poor in 1860. In the beginning of the 20th century it transformed into Standard Statistics Company that rated mortgage bonds and developed a stock market index that included 233 U.S companies. So the idea to evaluate not only one company but a certain field is not that new. Today the stock market index includes 500 large companies from the large-cap sector. This index is perceived as very representative because it includes companies from all sectors of the economy.
- S&P 500 Growth Index is one more index worth mentioning. It represents the fast-growing companies from the S&P 500. It’s not hard to guess which industry would be largely represented in this index — IT and AI sectors now significantly outweigh other industries.
- S&P MidCap 400 is also distinct from the S&P 500 index, worth watching for every investor who is thinking about investing in middle size companies. This index measures the performance of 400 companies to evaluate the return characteristics of this field.
Russell 200 (RUT)
Russell 2000 is an index for investors who believe that the future is small-cap companies. If you’re one of them, this is definitely the index for you to watch. Again, the focus lies on the U.S market and mostly it’s used as a benchmark for small-cap stocks. This stock market index may bring the understanding of the particular field of the market and if you’re not an experienced investor, it is important to remember that all the indexes are valuable but you shouldn’t forget about other factors that influence the performance of companies on the market, such as the economic cycle and so on.
There are also some indexes that are not that obvious but may come in handy if you’re interested in some specific markets. Let’s start from the hottest topic.
The S&P Cryptocurrency Broad Digital Market Index tracks the performance of the digital assets that meet the criteria of minimum liquidity. Cryptocurrency opened a whole new universe in the investment world and it was supposed to be somehow measured in traditional ways, which is what this index does.
One more important thing is the indexes are grouped not only by industry or market capitalization rate. There are indexes based on social factors, sector or value.
For example, JUST U.S Large Cap Diversified Index (JULCD) is an important index that tracks the performance of the companies that have high ESG scores. Over half of them are included in the Russel 2000 index. This score is high in the companies that are known for their employee benefits, outstanding atmosphere and strong commitment to keep the company culture on a high level. So, if you want to support reliable employers and work ethics this is a good index to watch.
How to Read Stock Market Indexes?
One of the main questions from beginners is “what is a stock market index's importance for me as an individual investor?”
- To understand the condition of the market: the one that is described in the index, certain industry or country. However, it’s important to remember that indexes do not represent the whole market but only a part of it.
- Indexes are good in terms of learning the historical background of an industry and to watch how it behaved during different parts of the economic cycle and times such as financial crises. This is not a representative forecasting tool.
- There are not that many investors that need to watch these indexes closely on an everyday basis unless it’s your full-time job. Indexes show the main trends and patterns, not something that can influence you every day.
There is a comparison to explain stock market index. Indexes are the universal language among business people from all over the world. People use it to compare, benchmark and evaluate over time.
For beginners and conservative investors stock index ETFs are a good start and decent long-term investment idea. For the general audience following main indexes is useful for being informed about the current market situation. Also, comparing your portfolio growth with an index helps assessing the performance and improving your strategy. This function is available at Gainy app.
What does it mean to invest in an index?
It’s not possible to buy shares in the Dow Jones Index but there are funds that hold all 30 shares of the companies in the proportion of its presence in the DJIA, which may be a good strategy for beginning investors. Also, you can buy an Exchange-Traded Fund (ETF) based on practically any stock or bond index. For beginners and conservative investors these funds are a good start and decent long-term investment idea.
How to read stock indexes?
When you look at the stock index chart, you see the general dynamics of the stock market or a particular field. If we talk about market capitalization, the average of the index is adjusted to the size of the company, which shows the importance of the index. For example, if a 1 million market-cap company drops by 5% it will influence the market less than a 5% drop in the share price of the company that is worth $500,000.
Do I need to watch all the main indexes?
There is no need to watch all the indexes but it’s important to know main trends and to know the historical context of the market of your choice.
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