| |
Stock Indexes: The Inside Story
By Ron King
Most of us have heard of stock indexes, but have only a fuzzy idea of them at best. This article aims to clarify some of the basics of stock indexes -- what they are and how they work.
What Is A Stock Index?
A stock index is simply an average price for a large group of stocks, either those on a particular stock exchange or stocks across an entire investing sector. Indexes are formed from stocks with something in common: they are on the same exchange, from the same industry, or have the same company size or location. Stock indexes give us an overall snapshot of the economic health of a particular industry or exchange.
Many stock indexes exist; in the United States the most well known are: the Dow Jones Industrial Average, the New York Stock Exchange Composite index, and the Standard & Poor 500 Composite Stock Price Index.
How Does It Work?
There are several ways to calculate an index. An index based solely on stock prices is called a "price weighted index." This type of index ignores the importance of any particular stock or the company size.
A "market value weighted" index, on the other hand, takes into account the size of the companies involved. That way, price shifts of small companies have less influence than those of larger companies.
Another type of index is the "market share weighted" index. This type of index is based on the number of shares, rather than their total value.
Index As Investment Tool
Another huge function of indexes is that they can function as investment instruments in and of themselves. Mutual funds based on an index duplicate the holdings of the underlying index. Thus, if index A rises by 1%, the Index A Mutual Fund rises by 1%. This has the tremendous advantage of lower costs. Plus these index funds have been shown to generally outperform managed funds.
The Big Indexes
One of the best-known indexes in the world is the Dow Jones Industrial Average. It is a "price-weighted average" index composed of the stocks of 30 of the most influential companies in America. Some feel that 30 companies are not enough to form an accurate assessment for so influential a measurement, but it is reported around the globe daily nevertheless.
The Standard & Poor 500 Index is based on 500 United States corporations, carefully chosen to represent a broader picture of economic activity.
Beyond the United States, the most influential index is the FTSE 100 Index, based on 100 of the largest companies on the London Stock Exchange. It is 1 of the most important indexes in Europe. 2 other important indexes are France's CAC 40 and Japan's Nikkei 225.
About the Author
Visit http://www.thestocktrade.com to learn more. Ron King is a full-time researcher, writer, and web developer at http://www.ronxking.com
Copyright 2005 Ron King. This article may be reprinted if the resource box is left intact.
Article Source: http://www.simplysearch4it.com/article/16382.html
| If you wish to add the above article to your website or newsletters then please include the "Article Source: http://www.simplysearch4it.com/article/16382.html" as shown above and make it hyperlinked. |
| Some other articles by Ron King | FDA Approves Lasik Eye Surgery
The Food and Drug Administration (FDA) approved a new custom lasik procedure in September of 2005. This new procedure can now treat ...
Building An Outside Deck
One of the most beautiful additions to any home is a deck. Not only does it add beauty, a deck also adds value to your home.
But there is much ...
Make A Good First Impression: Landscape Your Driveway
Is your driveway landscaped? It should be.
This includes the driveway itself, as well as the design elements on both sides. All sorts of materials from softscape options to hardscape are available to make your ...
College Basketball Jerseys: Don't Just Show Your Support -- Wear It!
Among the most highly prized possessions that any college basketball player can hope for is their college basketball jersey. The college basketball jersey represents a feeling of pride and belonging to ...
Basics Of Home Buying
The most important investment you will ever make is probably the purchase of a home. Finding the right home for you can be a long and arduous process, ...
The 7 Schools Of Feng Shui
Everyone has heard of Feng Shui, but what exactly is it? Feng Shui is an ancient Chinese belief that involves the study of both the natural and the created environments. To achieve ...
|
|
| |
|
|
|
