By Arjun Chandrasekar.
In simple terms, a stock market index shows the overall feeling of how an economy is progressing. An index, such as S&P 500, Dow Jones, and NASDAQ, is a composite, representative portfolio of investment holdings from a variety of companies across different industries. This “folder” of stocks can help investors compare current prices of stocks with past prices, and effectively calculate each stock’s overall performance and the market performance as a whole.
Mathematics is a huge part in calculations for the constriction of individual indexes. Indexes are used to track the movement and performance of different sections of the market. Investors can also invest in whole indexes, and can use them for their portfolio.
Some specific indexes focus on subsets of the market. For example, NASDAQ focuses on the technology sector of companies, so investors interested in tech companies would analyze the NASDAQ index. On the other hand, Dow Jones is in the industrial sector, so investors interested in companies such as IBM, Goldman Sachs, or United Technologies, would focus on this index. So on, so forth.
As we already know, the most popular and major stock indexes are Dow Jones, S&P 500, and NASDAQ, but there are many others such as NASDAQ 100, Russell 2000, Russell 3000, Wilshire 5000, etc, that have lesser known companies within. This doesn’t necessarily mean investors won’t look into and invest in these, but the majority of investors watch more popular indexes and the companies within that have higher growth potential in their respective industries.
Overall, indexes are made and trading using a group of stocks. It’s a measured value of a section of the market, and is calculated using the prices of each stock within. Investors can diversify their portfolios by investing in multiple indexes adding on to the stocks they hold.