What is an Index?

You may have heard of the term before, financial indexes, but just what exactly are they. Indexes, also known as stock market indexes, are the listings of stocks and any statistics that show a full of value of any given stock in the index. These indexes are generally used to show the character of all the stocks taken together.

These indexes are generally used to show the character of all the stocks taken together. These characteristics can include trading on the same market, belonging to the same industry or even market capitalizations that are the same or similar. Very often these stock market measurements are used as benchmarks in portfolios known as mutual funds. There are funds out there that contain the securities that are part of a given index. Not surprisingly, these funds are called index funds.

There are a few different ways to categorize financial indexes. They can be known as broad-base indexes for example. This generally is a reflection of the entire stock market and is a reflection of investors’ sentiment about the economy. A lot of the common indexes mentioned are broad-based indexes. These include but are not limited to the American Dow Jones Industrial Average and S&P 500 Index.

On the other hand there are many others that are considered specialized indexes.
The difference is that the specialized ones only track certain segments of the market. Examples of these types of financials include the Morgan Stanley Biotech Index or the Linux Weekly News. These can track different aspects such as companies of a certain size or with certain types of management. The Linux Weekly News tracks companies that use or sell products or even services that have their basis in the Linux operating system. Morgan Stanley Biotech (MVB) as the name suggests tracks a group of companies from the biotech sector.

Another type of index there is the price-weighted index. This includes ones such as the Dow Jones Industrial Average and NYSE ARCA Tech 100 Index. These kinds are based on the price that is considered in the determination of the value of the overall stack. This makes each individual stock in these types of financials extremely dependent on one another. There are a few sub-categories when it comes to these types. They include market value weighted or capitalization weighted indexes, which are determined by the size of the company.

As you can see, learning of the basics of financial indexes can be exhausting. Yet knowing details about them can greatly improve how you do in the market. Once you have a general understanding of the indexes themselves and how they are determined, you are well on your way to doing a lot better than you could imagine.