There are literally millions of different stocks available in the stock market. You have everything from the big companies like Microsoft and Apple, to little public companies you have never heard of. With all these companies and stocks, it can be difficult to keep track of them all, which can be a bit of an issue for investors looking to make their next offer.
Fortunately, someone saw this problem and created stock market indices. This is great way to see the value of entire groups of stocks without having to individually measure their values. A stock market index is not difficult to understand and if you’re a big investor they will help you a lot when it comes to choosing an area you want to invest in. The general basis of a stock market index is that it groups together big stocks to make them easier to value and measure. Continue reading for a more in-depth explanation.
What is the Stock Market Index?
A stock market index is an overall value produced when a number of stocks are combined and have their values expressed against another value on a specified date. Essentially, the value of several stocks are put together which is then represented by one value. This allows for large stock groups to be tracked and measured over time, allowing for better investment opportunities. One of example of a sto
ck market index is the Poor’s 500, which takes 500 US companies and combines them into one index value.
How Does a Stock Index Work?
So as we have just discussed, a stock market index is a value of several stocks combined. This gives that stock market an overall value. This value can change over time and helps investors compare the changes to their portfolio. If the stock index goes up one level, it essentially means the group of stocks has also increased by one, making it more appealing to investors. Of course, if that market drops by one level, the index will also drop by one level.
However, not all indices work like this. If the total market value of the DJIA drop by 9%, the index might not act in exactly the same way. In fact, this particular stock market (DJIA) is said to give a better representation.
The Most Common Stock Index
There are a lot of different stock indices and they all group together large number of stocks into smaller stock markets. Among all the indices that are available, the most common one has to be The Dow.
The DJIA (Dow Jones Industrial Average), which has been briefly mentioned above, is probably the oldest and most well-known stock index in the industry. The index contains some of the most important companies in the US, which currently stands at 30. The DJIA is a price-weighted index and used to be calculated using an average. This involved adding all the price-shares of each company and then dividing them by the number of companies in the index. However, this is no longer the case and more advanced algorithms now calculate the index.
The reason this index is so well-known is because changes here usually indicate changes in the entire stock market. Because the companies in the index are so huge and well-known, when they start to swing, it usually means everywhere else will too.
When you are first starting out you need to be able to understand stock indices. They are very important if you are investing because they can indicate whether or not there is a lot of risk in that particular market. Learning to look at larger indices is also important because some (like the DJIA) can tell you what is happening in the entire stock market. With the right experience and knowledge, stock indices are very helpful.