Wednesday, May 5, 2010

Stock Market Index - Monitoring the Performance of Stocks

Stock market index

A stock market index is a number that measures a section of the stock market or a group of stocks. Any movement of stocks in this group will affect the index value. The stock market index in turn is used to measure the performance of portfolios like mutual funds.

For example, XYZ index is composed of 5 companies. Two companies out of 5 companies of XYZ go up in value today, one company goes down and the remaining two stay as they were yesterday. The total value of the stocks of these 5 companies is now 2% higher. The best way to look at an index number is to compare it with the previous day’s figure to see if the value goes up or down. This is more important than points.

You heard about stock market indexes like Dow Jones or S&P 500 index? They are indexes made up of stocks of different companies.

Types of indices

The Dow Jones Total Stock Market Index represents the stocks of the companies publicly traded in the United States, including those traded in New York Stock Exchange (NYSE) and American Stock Exchange (ASE).

A division of McGraw-Hill, Standard & Poor’s or S&P is also one of the most famous indices. The number following S&P refers to the number of companies that are included in the index. For example S&P 500 for 500 companies, 1500 for 1,500 companies and so on. The same is true with the British FTSE100 stock market index, informally “footsie” index which lists 100 highly capitalized UK stocks in the London Stock Exchange.

S&P 500 and FTSE 100 together with the Japanese Nikkei 225 are some of the mostly quoted indices in the world’s business news. MSCI World, (MSCI stands for Morgan Stanley Capital International), is an index that includes the world’s large companies regardless of where they are traded.

Some indices track the performance of specific sectors of the market like The Morgan Stanley Biotech Index for the 36 firms in the biotechnology and Linux index for companies that service or sell Linux operating system environment.

Why are indices important?

A national index stands for the country’s stock market index and the performance of the country’s stocks, thereby reflecting an investor’s sentiment with regards to the country’s economy.

Measure your investments against a relevant stock market index if you are investing in individual stocks or mutual funds. It is highly important to know if your investments are consistently lagging behind the index or not. If it is lagging behind, then it might be the proper time to come up with a new investing approach.

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