Market Indices — Find your place in the market by checking the index
The investment world has benchmarks too. The performance of stocks and bonds is measured against market indices. A market index is a large sampling of securities all belonging to the same investment category, such as blue chip stocks or bonds. Grouping securities together and calculating and tracking their performance as a whole allows investors to get a sense for how a particular market segment is doing. And you can compare the performance of certain mutual funds or their personal portfolio against the index.
Let’s take a quick look at a few of the most recognizable market indices.
Grouping securities together and calculating and tracking their performance as a whole allows investors get a sense for how a particular market segment is doing.
Dow Jones Industrial Average
Usually referred to as simply, “the Dow,” this index tracks the prices of 30 blue chip U.S. stocks. A blue chip stock is a share in a large, established company. Blue chip stocks are often seen as less risky than other stocks. This index is used by investment professionals and the financial media as a general indicator of overall market conditions. Occasionally, companies in the Dow may be deleted and replaced by other companies that are having a greater impact on the economy.
S&P 500 Index
This is another common index that focuses on large cap companies, but it includes 500 companies considered leaders in various industries. Unlike the Dow, companies in the S&P 500 are weighted according to their market capitalization. For example, a company with a market value of $70 billion would impact the performance of the index 10 times more than a company with a market value of $7 billion. The S&P 500 provides a broader overview of stock market performance compared to the Dow because it includes a larger number of companies.
Russell 1000 Index
This index measures the performance of the 1,000 largest U.S. companies, which accounts for about 90 percent of the trading activity on U.S. stock exchanges. Like the S&P 500, it is market cap weighted. Companies range in size from $1 billion to more than $400 billion with an average market cap of around $80 billion. Unlike the S&P 500 or the Dow, companies in this index are not selected by a committee but are included based on their market value.
NASDAQ Composite Index
This index measures more than 3,000 U.S. and foreign companies listed on the NASDAQ exchange. The NASDAQ market also has eight separate indices covering individual sectors such as biotechnology, computers, insurance and telecommunications, among others.
Barclays Capital Aggregate Bond Index
This index measures the relative performance of all bond types in the U.S., including U.S. Treasuries, municipal bonds, mortgage-backed securities and corporate bonds. It is a market cap weighted index.
See if your investments measure up to the indices
It’s helpful to use indices to track how your investment portfolio and various mutual funds are performing. Make sure to use the proper index for whatever investment type you’re measuring.