Types Of Stock Market Indexes

An index is a measurement which represents the value of a batch of stocks. Investors use this index to see how the stock market is doing overall, or how parts of it are doing.

The oldest stock market index is the Dow Jones Industrial Average which covers the stocks from 30 different companies.

Stock market indexes are calculated on the concept of weighting, which describe the relative importance of the items when they are computed within the index.

There are several different kinds of indexes, some of which include:

Price Weighted Index

This type of stock market index tracks changes based on the change in individual stock’s price per share.

For example, suppose you owned two stocks. Stock A is worth $30 and stock B is worth $60. In a price weighted index a greater proportion of the index will be allocated to stock B.

The index number would reflect this as stock B being 67% of the index and stock A being 33% of the index.

Market Value Weighted Index

A market value weighted index tracks the proportion of a stock based on its market capitalisation (which is also known as market value).

For example, if you have 10 million shares of a $30 stock (stock A) and 1 million shares of a $50 stock (stock B), the market cap of stock A will be $300 million and the market cap of Stock B will be $50 million.

In a market value weighted index, stock A will represent 83% of the index value and stock B will represent 17% of the index value.

Broad Based Index

A broad based index is used by investors to compare how their investments are doing by looking at a snapshot of the entire market.

Composite Index

A composite index is an index which is a combination of several indexes. For example, the New York Stock Exchange composite tracks all the stocks on the New York Stock Exchange.

Other Stock Market Indexes

Although most people tend to think of the Dow, Nasdaq and Standard & Poor’s 500 when you mention stock market indexes, you will most likely find it useful following other indexes in addition to these.

This is because different indexes can cover different aspects of the market such as small-cap and mid-cap stocks.

When you invest in a particular industry, you will also need to check out indexes that cover that industry.

For example, if you are investing in Internet stock, you can look at the Internet Stock Index to compare your stock against other stocks and see how it is doing when it is measured against the index.

There are lots of different types of stock market indexes such as those covering transportation, retailers, computer companies and real estate firms to name a few.

What you chose to look at will be related to your field of interest, and the type of investment you have chosen to make.