Market Indexes

Market Indexes……. In my opinion this is where the stock market becomes complicated like trying to solve a Rubik’s cube that is locked in a safe that was tossed in the ocean kind of complicated. There are many different indexes and also different ways to use them. So first off let’s get into what an index really is. I’m sure you’ve heard of them before the big 3 are The Dow Jones Industrial Average, S&P 500, and The Nasdaq

What an index is: An index is a tool used by investors to help them describe how the market is performing in a broad sense. Indexes are highly used numerical values that illustrate how a portfolio of stocks is performing. The Dow Jones Industrial Average tracks 30 well-known companies such as Apple, Microsoft and Visa. The S&P 500 is broader and tracks the top 500 U.S. based companies meaning it’s a far better indicator of how the economy is performing. 

It’s the index number that people tend to fixate on. There are multiple ways to calculate the index number but what you need to remember is that, the numbers show a change from the base value or original number. What’s important however, is whether the index is up or down. The percent change will give an approximate estimation of how the index is performing. The index number being up is good news but when it’s down it’s bad news. Indexes are like markets but not the entire market. You can’t base how the entire market is doing just because the S&P 500 is performing well. These indexes will only represent a portion of the entire market.  

The Pro’s behind Indexes: Good information can be obtained from knowing how to read an index. For one indexes are able to show us trends and also make us aware of changes in investing patterns. Indexes provide a meter stick for us to use for comparison. It’s like an out of focus snapshot. 

The Con’s behind Indexes: Firstly, indexes have serious design flaws which make it hard to say that it really represents anything. People tend to do a thing called making mistakes which also doesn’t help. Sometimes a stock will be included into the index when it shouldn’t be. There also may be additions to the index which are also not supposed to be there. As well all it takes is one large company to have a bad day to completely rattle the index. 

What can be used from indexes?

Plain and simple indexes are not the entire market no matter what the 3 big indexes say. You need to make sure to stay focused on your own stock and stock you may potentially purchase. Indexes are completely mathematical and should not be treated any differently. This is the stock market emotions have no use here. Don’t waste all of your precious time by keeping minute by minute index reports around. Indexes are also alright for spotting historical trends but do not provide enough information to make solid forecasts of the future. 

The big 3 indexes are: The Dow Jones Industrial Average, S&P 500, and The Nasdaq Stock Market Composite.  The big 3 indexes should serve most investors well. Make sure you understand how an index is weighed.