From a financial standpoint, an index tracks the performance of a market, asset, sector, or strategy. Indexes are extremely useful metrics that affect everything from the rates of return on market-linked certificates of deposit (CDs) to consumer sentiment about the state of the economy. Read on to learn more about this basic concept and how an index can influence your financial future.
What is an index?
What is an index?
An index is simply a number that represents the value of a basket of financial instruments. The investing world is full of them. Examples include:
- The S&P 500
- The Dow Jones Industrial Average
- The Russell 2000
- The Nasdaq Composite Index
- The Hang Seng
- The price of almost any exchange-traded fund (ETF)
All of these have one thing in common: They help investors gauge the performance of financial assets.
By itself, however, the value of an index doesn't mean much. Instead, the daily oscillations of indexes like the S&P 500 and the Dow Jones Industrial Average are used as a proxy for the health of the economy in general and large corporations in particular. To a certain degree, it's a defensible use. The start of the Great Depression was tied to Black Monday in 1929, when the Dow lost almost 13% of its value. During the 2007-09 financial crisis, the S&P 500 lost 9% of its value in a single day in late September 2008.
But an index is a fairly blunt tool when it comes to analyzing particular events. Instead, an index is best used to gauge sentiment within a broad market over an extended period. Fortunately, there are enough financial indexes to provide trends for almost any market, sector, asset, or strategy.
