Nordstrom Breaks Retail's Losing Streak, But This Stock Just Broke a Cardinal Rule
Markets had another topsy-turvy day.
A stock market index shows how investors feel an economy is faring. An index collects data from a variety of companies across industries. Together, that data forms a picture that helps investors compare current price levels with past prices to calculate market performance.
Some indexes focus on a smaller subset of the market. For example, the Nasdaq stock index closely tracks the technology sector. So if you want to know how technology companies are performing, you’d want to look at the Nasdaq index.
Indexes also vary in size, with some tracking just a handful of stocks and others looking at thousands. Each index serves a unique purpose because different investors are interested in different sectors.
Beyond these famous stock market indexes, however, there are thousands of lesser-known indexes. You can find indexes that reflect the performance of stocks in a certain country or that do business in a given sector of the economy. Some indexes separate large, mid-sized, and small companies into different categories. Others use investing strategies like growth, value, or dividend investing to select component stocks. Pretty much any type of stock you might be interested in, there's an index for that. The rise of index mutual funds and ETFs has led to a proliferation of indexes to help fund managers use passive investing strategies to minimize costs and let investors tailor their portfolio exposure as precisely as they like.
Technically, the S&P 500 is a part of a total-market index known as the S&P 1500. The S&P 500 is the large-cap portion, but other segments are:
Reading an index correctly requires that you look at how the index value changes over time. New stock market indexes always begin with a certain fixed value based on the stock prices on its starting date. Thereafter, future index values measure rising and falling prices for those component stocks.
Not all stock market indexes use the same starting value, however, so just measuring index changes by using points can be misleading. For instance, if one index rises 250 points in a day while another rises just 10 points, it might seem as though the first index performed far better. However, if the first index started the day at 25,000 while the second index was at 250, then you can see that in percentage terms, the gains for the second index were far greater. A higher percentage gain means a bigger profit for you if you invest in funds that track the index, so it's better to focus on percentages than on point movements.
Moreover, even the most popular stock market indexes don't generally measure the performance of the entire market. Knowing which stocks are in an index can tell you which parts of the stock market are contributing to that index's performance and can explain why other indexes might not be performing the same way.
Stock market indexes can be useful to follow for a few key reasons:
Stock market indexes make it easier to know how the market is performing without having to follow the ups and downs of every individual stock. They also open up simple investment opportunities that even novice investors can use to participate in the long-term success of the stock market.
By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals.Warren Buffett
Each stock in an index has a weighting assigned to it. Stocks with higher weightings have more influence on the index's movements than those with lower weightings. There are three different ways that indexes typically assign weightings to their stocks:
There are some other stock market indexes that use proprietary methods to come up with weightings. For example, some indexes assign weightings based on the dividends that a stock pays out. For the most part, though, market-cap-weighted indexes are most prevalent, as they're often the easiest for index funds to track.
Markets had another topsy-turvy day.
Trading in tech stocks remained turbulent.
Investors are thinking twice about the stock market's recent rally.
A nice bounce for the stock market continued Wall Street's upward momentum.
As the stock market rises, these companies are getting some attention from investors.
Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.