What are stock indexes?
Recently, I have been getting questions regarding what a stock index is. If you are learning how to invest, you probably will have noticed some words that keep repeating. You probably will have seen NASDAQ, DOW JONES and the S&P500. These are stock indexes in the US market. But why do we keep seeing it again and again?
The Definition Of a Stock Index
From Wikipedia, a stock index or stock market index is a measurement of a section of the stock market. It is computed from the prices of selected stocks (typically a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.
What does it really mean?
In human language, it means a stock index is a selected group of companies to represent the market.
NASDAQ, DOWS and the SAP500 are composed of some of the biggest US stocks, but they each have unique characteristics that appeal to different kinds of investors.
NASDAQ: Represent Technology Stocks
The Dow Jones: 30 companies in the US. In the past, these were the biggest companies and therefore a good indicator of the US economy’s strength. Though it is no longer the case now, the Dow still includes major household names like McDonald’s and Nike.
S&P 500: 500 companies in the US. This will give investors a broad read of the US economy. Unlike the Dow, however, its average is weighted by company size, which means the biggest companies have the biggest impact on the index.
That’s all to what a stock index is.
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