What’s an Index? An index provides “a summary of the market [based on] the top stocks within a market.”
Indices reflect numerous different markets; major ones include:
The Dow—Tracks 30 of the biggest companies and is considered a leading benchmark of the stock market’s overall health. In reality, it only represents about a quarter of market’s value.
The S&P 500
—Includes 500 big U.S. companies and represents a wide variety of sectors (health, energy, financial) and about 70% of the value of the stock market.
The Wilshire 5000—A.K.A. the total market index, it includes most publicly traded companies, large and small.
The Nasdaq Composite—Tracks more than 3,000 companies that are part of the Nasdaq exchange (with a focus on tech).
The Russell 2000—Tracks the performance of 2,000 small-cap companies.
There are also indices for the bond market, like the Lehman Aggregate Bond Index.
Does an index tell you everything about a given market? No. The Dow is not the market, it’s just a market indicator. People use indices to gauge the health of certain sectors, and as benchmarks against which they measure the performance of securities in that sector.
How do index funds work? As you might guess, index funds are mutual funds comprised of stocks that mirror certain indices like those above.
Pick your angle. Which index do you watch?