Understanding Stock Indices
Stock indices are used as a shorthand method of talking about prices for a segment of the stock market. These indices are used by investors and fund managers as one of the many tools to evaluate the performance the market
The application of indices is very wide, including the use of indices as benchmarks for investor portfolio comparisons and as underlying components of financial products, including Exchange Traded Funds (ETFs) and derivatives.
Stock indices are used for many different purposes in investment analysis and money management. They are derived from a selected basket of equities, picked from a single, or multiple stock exchanges. Each is represented in index points.
Stock indices have developed in recent years to become much more than economic indicators and with growing developments in financial markets, more technical functions of indices have been brought to the forefront.
Stock indices may fall into a variety of classes. A broad-base index represents the performance of a whole market and is thought to reflect investor sentiment on the state of the economy. Other indices focus on specific industries or may be classified according to the method used to determine its price (weighting).
Some of the better-known stock indices include the Dow Jones Industrial Average, the S&P 500, the Wilshire 5000, the Nikkei 225 (Japan), and the Sensex (India).
Passively-managed mutual funds, known as index funds are often based on market indices. These funds attempt to copy the performance of specific stock indices.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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