We are confident that you have come across the words stock market once or twice. And if you were to be asked what it was, the best description you would give is that it has something to do with money and that it is done via the internet. Well, you are half way there, but that would not entirely cover it. Therefore, in this article, we shall share what the stock market is plus the types of indices they use. Hopefully, by the end of this piece, you will be knowledgeable on these terms and what they are all about.
Definition of The Stock Market And A Stock Market Index
The stock market is an integration of markets where buyers and sellers; including huge corporations and companies, get to exchange or trade off their products and services at a price. The stock market simply works like an auction center where the buyers and the sellers get to negotiate prices and make trades.
A stock index, on the other hand, is an indicator or a measurement of a section of the stock market. It acts as a valuable tool used by investors and financial gurus to run a comparison in the returns of a specific stock investment. It measures the change in the financial market and represents the descriptions of securities trading on one particular market.
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And below are the majorly known types of stock market indices:
- Standard & Poor 500 Index
Also referred to as S&P500, this type of market index is a large and very diverse stock index that consists of up to 500 of the most traded stocks. Most of these stocks are mainly traded off in the USA. And considering the USA is a superpower state when it comes to financial activities, this index impacts the whole world’s market. The firms that are included in this index are the financial sector, healthcare, energy, information and technology, media, industries, and consumer staples. This stock index capitalization is weighted such that each stock is represented in proportion to its market capitalization. Meaning if the total market value of all represented companies increases by a certain percentage, the value of the index also increases to that same percentage.
- Dow-Jones Industrial Average Index
The DJIA is one of the oldest indices known in the stock market operational in a large section of the USA market. The Dow is a price-weighted average stock market index which means that its companies stocks are weighted according to their share price. This kind of index is influenced by a stock that has a higher rate to it. Therefore a stock with fewer prices has the least influence on the index. This means that a percentage change in the DJIA is not interpreted as a similar change in the overall stock market index. The dowjones today comprises of the 30 major companies that belong to the world industry leaders.
- Financial Times Stock Exchange Index
This index comprises of 100 companies that are listed on the London stock exchange. Hence it is also referred to as the FTSE 100 index. The companies represented here have the highest market capitalization and are internationally focused, meaning they are greatly affected by the exchange rate of the Pound. The market capitalization is weighted on the share prices; hence, the larger firms make more impact on the index as compared to the smaller ones.
- Russell Index
This index consists of a collection of other indices, namely; Russell 2000 and Russell 3000. Russell 2000 consists of 2000 small capital companies. This index exclusively shows how smaller companies in the USA are doing. These small-cap stocks have been known to perform better than the large-cap companies despite their high volatility. The Russell 3000, on the other hand, consists of both the Russell 1000 and Russell 2000 under it. If you are searching for an index to show the entire U.S stock market, then this is the index to search for.
This index is a technology-based stock index which measures the performance of around 3000 companies, found within the U.S as well as internationally. The most renowned companies regulated include Apple, and Google, among others. Not only does it monitor the established companies but also the ones in their growth stages. The other sectors tracked by this index are industrial, insurance, energy, and transportation. The value of the NASDAQ is directly proportional to the performance of the overall tech sector.