Understanding Stock Market Indices

Understanding Stock Market Indices When watching the news on television or listening on the radio, there are often reports about the daily performance of the stock market. Usually the announcer is referring to either the Dow Jones Industrial Average or the S&P 500, and sometimes you might hear about the NASDAQ. These are just three of the many stock market indexes, or indices, that are active in the United States. There are also many stock market indexes in countries around the globe. What Is a Stock Market Index? A stock market index represents a particular segment of the stock market and measures, as an average, the performance of all the companies included in that index. Some indexes measure the performance of large companies known as large caps. Large caps are companies with large capitalization, meaning these companies have large financial resources. Some indexes measure the performance of mid-caps, and small caps. There are also indexes that measure market sectors, such as transportation stocks, utility stocks, and commodity stocks, to name a few. In fact, there are dozens of indexes, all designed to help investors understand whether an investment in a particular area of the stock market has the potential for making a profit. How Is a Stock Market Index Composed? The purpose of an index is to identify the trend of a market sector so that investors can determine...

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