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Learn Stock Market Trading Tips
What
Exactly is a Stock Index?
In the fast paced ever-changing world of today’s
stock market you need a quick way to analyze and graph the
movement from day to day, month to month or year to year. Stock
indexes such as the Dow Jones Industrial Average and Standard
and Poor’s 500 give you a tool to do just that.
But
what exactly is a stock market index? A stock
market index is a listing of a group of stocks, and a number
to go with
them. The number that goes with them is used to track trends
in the market, going up or down when the market does. In general
the stocks have something in common, such as trading on the
same exchange, or belonging to the same industry. The Indexes
can be classified in a wide variety of ways. The most widely
quoted Index in the world, the Dow Jones Industrial Average,
is a broad based index designed to reflect the stock market
as a whole and give an idea of investor sentiment on the state
of the economy.
How
are indexes calculated?
Different Indexes are calculated in different ways and it
is important for stock investors and traders to understand
how the index they are using is calculated because the calculation
method has a large impact on results. You need to know what
is being measured and how. The Dow Jones Industrial Average,
for instance, was originally just that. In the beginning, when
there were no calculators or computers, and calculations needed
to be done quickly and by hand, there were 12 stocks in the
Dow Jones Index, which were counted up and then divided by
12. The results were expressed as points. Now, with computers
the norm, the index is calculated differently.
Most stock indexes such as Standard & Poor's
500 Index and the NASDAQ Composite Index are weighted
and give more weight
to larger companies. These are capitalization -weighted indexes
(Capitalization is the total market value of any outstanding
shares of a companies stock.) These indexes are not valid indicators
of the price of the average stock in the index. Since there
should be more investors in the larger companies they do give
us an idea of price levels in an average investor’s holdings.
The Dow Jones Industrial Average, however is NOT capitalization-weighted.
It is price weighted, giving more importance to higher priced
stock then lower priced ones. The Dow Jones Industrial Average
now includes 30 stocks. It is calculated by adding together
the price of those stocks and then using a divisor. The Dow
average is quoted in points and not dollars.
Types
of indexes
The most widely quoted indexes are the broad based indexes,
which attempt to represent the movement of an entire stock
market. They normally include the largest companies on the
nation’s largest stock exchange. Standard and Poor’s 500 (S+P
500 index) and the Japanese Nikkei 225, as well as the Dow
Jones industrial average, are examples of this type of index.
More specialized sorts of indexes are indexes like Morgan
Stanley’s Biotech, which consists of 36 American biotech firms,
or NEMA’s EIS (National Electrical Manufacturer’s Association’s
Electroindustry Stock Index) which tracks Electroindustry stocks.
Indexes that track companies of a certain size or a certain
type of management are also fairly common.
Indexes may also include stock on more than one exchange…
Socially
Responsible Indexes or SRI Indexes
Another
specialized index type are those for Socially Responsible
Investing indices that include only those companies satisfying
ecological or other social criteria. Often called SRI or Socially
Responsible Indexes, SRI indexes allow investors to watch stocks
according to their beliefs and performance on Social issues,
and may exclude companies such as arms or tobacco companies.
They include The Calvert Group, Domini, the Dow Jones Sustainability
Index, and the FTSE4Good indices.
With so many ways of grouping stock it is often difficult
to choose which index, if any, are the ones you should follow.
Deciding what you want to track and how you want to track it
is important. Make sure you pick the indexes that are right
for your investment strategy, and easily understandable for
you. # # # # # SolveYourProblem.com : 2007
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