The Stock Market Index

Is used to construct index funds and ETFs

A stock market index is a measure based on a portfolio of stocks representative of a particular market or a part of it.

A sub-index is a group of stocks that is part of an index but is also tracked separately as a smaller, separate index.

Each index has its own method of calculation and is usually expressed in terms of a change from a base value.

The percentage change is more important than the actual numeric value.

An index may be representative of a particular country such as the Chinese stock market index or the India stock market index.

Stock indices also exist for particular market segments such as the small cap stock index and the penny stock index.

Stock market indices, are used to construct stock index mutual funds and exchange-traded funds (ETFs) whose portfolios mirror the components of the index.

Index stock mutual funds and exchange-traded funds (both based on indexes) are the financial instruments that allow investors to invest in stock representing broad market segments and/or the total market.


Best Known Indexes

The Standard & Poor's S&P 500 stock index is one of the world's best known indexes, and is the most commonly used benchmark for the stock market.

Monitoring the 10-day moving average of the S&P 500 softens out volatile daily market movements. This is used by strategists and analysts to judge momentum and emerging trends.

Other prominent U.S. indexes include the Wilshire stock index (total stock market) and the EAFE stock index (stocks in Europe, Australasia, Far East).

The FTSE (pronounced Footsie) is an independent company owned by The Financial Times and the London Stock Exchange. The FTSE Group calculates over 100,000 indices covering more than 48 countries and all major asset classes.

Other commonly quoted indices include ...

The Dow Jones Industrial Average (NYSE: DJI, or the Dow 30, or the Dow Jones, or The Dow) is the oldest continuing U.S. market index. It tracks 30 of the largest and most widely held public companies in the United States.

The All Ordinaries (All Ords) is the oldest index of shares in Australia, so called because it contains nearly all ordinary (or common) shares listed on the Australian Stock Exchange (ASX). The importance of the All Ords has been lessened by the introduction of the S&P/ASX 200.

The Nikkei 225 is an index for the Tokyo Stock Exchange (TSE) and is the most watched index of Asian stocks.

The DAX 30 is a market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange.

The CAC 40 (French: CAC Quarante) is a benchmark French market index. The index represents a capitalization-weighted measure of the 40 most significant stocks among the 100 highest market caps on the Paris stock exchange.


To Conclude

As a value investor, I do not participate in stock index investing or ETFs as I cannot value these instruments in a meaningful way.

However, my local stock exchange index does provide me with an indication of the overall state of the market compared to its long-term trend.

So if the stock market index is at an historical high, it is a sign (albeit crude) that some stocks in my portfolio might be overvalued.

Return from Stock Market Index to How Do Mutual Funds Work

Return to Value Investing Home Page