Needless to say, learning the basics when it comes to investing in the stock market can make a huge difference, especially if your goal is to go big and all out in this financial venture. One of the things that new investors should pay attention to first is in understanding the definition of the stock market index and how knowing your way around it can help you make the most strategic investment decisions.
Basically, a stock market index is a statistical measure of performance for specific stock portfolios, representing a portion of the actual, overall market. Here are the things that you should know about today’s stock market indices.
- An index serves as a market performance tracker.
A stock market index provides investors and market participants with important and updated information about the performance of the entire stock market. For instance, a change in the price of a specific index reflects a corresponding change in the stocks belonging to the index.
- Stock indices can be constructed through different methods.
Global indices often use market capitalization weighted (also known market cap) method. Basically, this construction uses a company’s market cap to determine how much of the index it will cover. In other words, big companies mean larger weighting in the index. Another less popular but highly effective way to build a market index is the equal-weighted method. Here, market caps don’t matter, creating equal weighting for both large and small companies.
- Anyone can create a stock market index.
Since a stock market index is simply a list of stocks, anyone who has the right knowledge and expertise can create an index. The difficult part is, building the index’s reputation and competing among well-down indices such as the S&P 500 and the Dow.