Total Return Index and Stock Investing

By Stock Research Pro • November 18th, 2009

The total return index is an equity index that serves as a tool to measure the overall performance of a group of stocks over some period of time. A total return index works under the assumption that all cash distributions (such as dividends) that are associated with the stocks in the index are reinvested back into the index. Because of this, a total return index is seen as providing a complete picture regarding performance.

Total Return Index Examples

S&P 500: The S&P (Standard & Poor’s) 500 is an index that consists of 500 stocks that are included based on market size, industry, and other factors. Considered to be the leading indicator of U.S. equities, the S&P 500 covers about 75% of the toal U.S. stock market capitalization.

Russell 2000: The Russell 2000 is an index that tracks the performance of 2000 small-cap stocks (companies with market capitalization between $10 million and $2.3 billion). The Russell 2000 is a weighted index that, due to the lack of maturity and smaller market cap of its included companies, can be very volatile.

Wilshire 5000: The Wilshire 5000 is the broadest index of common stocks traded on the NYSE, the AMEX and over-the-counter. Despite its name, the Wilshire 5000 includes about 6000 stocks and offers a good representation of the overall market.

The Value of a Total Return Index for Stock Investors

A total return index can provide stock investors with an idea of when to buy, sell, and hold stocks in that tracking an index can indicate the direction in which the included stocks are headed.

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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