In addition to individual stocks, many investors are concerned with stock indices, which are also called indexes. Indices represent aggregated prices of a number of different stocks, and the movement of an index is the net effect of the movements of each individual component. When people talk about the stock market, they often allude to one of the major indices such as the Dow Jones Industrial Average (DJIA) or the S&P 500.
The DJIA is a price-weighted index of 30 large American corporations. Because of its weighting scheme and the fact that it only consists of 30 stocks (when there are many thousands to choose from), it is not really a good indicator of how the stock market is doing.12 The S&P 500 is a market-cap-weighted index of the 500 largest companies in the U.S. and is a much more valid indicator.
Indices can be broad such as the Dow Jones or S&P 500, or they can be specific to a certain industry or market sector. Investors can trade indices indirectly via futures markets, or via exchange-traded funds (ETFs), which act just like stocks on stock exchanges.
A market index is a popular measure of stock market performance. Most market indices are market-cap weighted, which means that the weight of each index constituent is proportional to its market capitalization. Keep in mind, though, that a few of them are price-weighted, such as the DJIA. In addition to the DJIA, other widely watched indices in the U.S. and internationally include the:
- S&P 500
- Nasdaq Composite
- Russell Indices (Russell 1000, Russell 2000)
- TSX Composite (Canada)
- FTSE Index (UK)
- Nikkei 225 (Japan)
- Dax Index (Germany)
- CAC 40 Index (France)
- CSI 300 Index (China)
- Sensex (India)