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Stock Index

  • Writer: Charles Lin
    Charles Lin
  • Aug 15, 2021
  • 2 min read

Updated: Nov 28, 2022

Introduction


What is a stock index? A stock index takes a group of different stocks and measures the performance of all of them combined.


These indices (plural of index. Yes, it’s weird.) can be used to look at how a certain industry, or even the entire stock market, is doing because it takes the average of many different stock prices, and is not as affected by a drop in one stock’s price.


For example, in a certain industry, if one stock price drops, but every other one goes up, that means the overall industry did well on that day, even though one stock price went down. It was averaged out by the other stocks.


Common Indices

Here are the most common indices. Some of these you might even have heard of.

  • Dow Jones Industrial Average: Also called the Dow Jones or just the Dow. It measures the performance of 30 large companies, and is often used to measure the strength of the entire stock market.

  • Standard and Poor’s 500: Commonly called the S&P 500. It measures the performance of 500 large companies. It is a very common measure of the stock market’s performance because it takes into account so many companies.

  • Nasdaq: This index is interesting because it measures the performance of stocks on the Nasdaq stock exchange, which is an entirely separate exchange from the main one in the United States, the New York Stock Exchange (NYSE). The Nasdaq is mostly known for technology stocks, and has many names that you might be familiar with, like Apple and Microsoft.

  • Russell 3000: This index measures the performance of the 3000 largest companies by market capitalization (the total worth of all stocks in the company, calculated by multiplying the number of shares outstanding by the share price). It is further broken up into the Russell 1000, which measures the performance of the first 1000 companies in the Russell 3000, and the Russell 2000, which measures the performance of the last 2000 companies in the Russell 3000.




ETFs and Mutual Funds

Many ETFs and mutual funds base themselves off of stock indices. If you don’t know what an ETF is, click here. If you don’t know what a mutual fund is, click here (Part 1 Part 2). They follow the performance of the index, so when the index goes up in price, the price of the fund goes up, and when the price of the index goes down, the price of the fund goes down. That’s why these funds tend to be safer than individual stocks, since they are an average of many different stocks.


Conclusion

That might have been a lot to take in, especially all of the major indices and what they represent. Don’t worry if you didn’t get all of them, though. Once you dig deeper into stocks, you’ll find that they come up so often that you’ll memorize them without even thinking about it.


Sources

 
 
 

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