A market index, stock index, or stock market index is a method used to track the performance of a group of financial products uniformly. The stock market index is an indication of the value of a segment of the stock market and helps investors compare actual stock prices with past prices to evaluate market performance.
Simply put, a market index is a mathematical average of how a certain financial market is doing. An example of an index is if you took the weight of 10 people and then worked out the average weight, that would be an index. As people’s weights change the index would change too.
Some of the market’s leading indices include:
- S&P 500 (top 500 largest companies in the US)
- Dow Jones Industrial Average (30 largest companies in the US)
- Nasdaq composite (3,000 stocks with a big focus on technology companies)
- MSCI world index (all major stocks across 23 developed countries)
- The dollar index (shows how strong the US Dollar is)
Investing in a portfolio of indexes can be a good way to optimize returns while balancing risk. With CFI, you can trade a diversified number of [indices] including US, European and Asian products. If you have a certain view on a specific stock market or the stocks of a region, go for indices as they allow you to have directional views on a large number of companies within one product, instead of buying or selling individuals stocks.
Key takeaways:
- It is used by traders to describe the market and to compare the return on investments
- An index is a calculation taken from the prices of a group of stocks using a weighted arithmetic mean
- The S&P 500 is the largest stock market index