Share Market

A stock market index is a method of measuring a section of the stock market. A stock market index is a bunch of stocks grouped together to measure a certain sector (utilities, banks, tech stocks, etc.) of the stock market. Many indices are cited by news or financial services firms and are used as benchmarks, to measure the performance of portfolios such as mutual funds. Alternatively, an index may also be considered as an instrument which derives its value from other instruments or indices. The index may be weighted to reflect the market capitalization of its components, or may be a simple index which merely represents the net change in the prices of the underlying instruments.

A ‘national’ index represents the performance of the stock market of a given nation—and by proxy, reflects investor sentiment on the state of its economy. The most regularly quoted market indices are national indices composed of the stocks of large companies listed on a nation’s largest stock exchanges, such as the American S&P 500, the Japanese Nikkei 225, the Russian RTSI, the Indian SENSEX and the British FTSE 100.

The concept may be extended well beyond an exchange. The Wilshire 5000 Index, the original total market index, represents the stocks of nearly every publicly traded company in the United States, including all U.S. stocks traded on the New York Stock Exchange (but not ADRs or limited partnerships), NASDAQ and American Stock Exchange. Russell Investment Group added to the family of indices by launching the Russel Global Index.

More specialized indices exist tracking the performance of specific sectors of the market. Some examples include the Wilshire US REIT which tracks more than 80 American real estate investment trusts and the Morgan Stanley Biotech Index which consists of 36 American firms in the biotechnology industry. Other indices may track companies of a certain size, a certain type of management, or even more specialized criteria — one index published by Linux Weekly News tracks stocks of companies that sell products and services based on the Linux operating environment.

Portfolios of individual stocks or mutual funds are often compared to a stock market index to see how well they are performing. For example, a number of retail stocks such as Old Navy, Macy’s, etc. will be grouped together to create a retail stock index. This index will then be used to track the “general” performance of the retail industry.

As the stocks in this retail group change value, the index also changes value. If the index goes up by 1% then that means the “total value” of all the securities (stocks) that make up the index have gone up in value by 1%.If you’ve purchased a retail stock such as Macy’s, then you would compare Macy’s performance against the retail index. Ideally you would want the performance of Macy’s to be better, or at least keeping pace with the index.

An index is also how people keep track of how well their investments are doing. Mutual fund managers and individual investors will find a stock market index similar to the portfolio of stocks they hold.