Stock Index

A stock index is a statistical measure that reflects the performance of a specific group of stocks, often representing a particular market or sector. Indices are used by investors to track the performance of the overall market or specific categories of stocks, such as technology, large-cap, or international equities. Common examples of stock indices include the S&P 500, the Dow Jones Industrial Average (DJIA), and the NASDAQ Composite.

Example

The S&P 500 index tracks the performance of 500 large-cap companies in the U.S., serving as a benchmark for overall stock market performance.

Key points

• A statistical measure that tracks the performance of a group of stocks.

• Represents a specific market or sector.

• Used as a benchmark to evaluate investment performance.

Quick Answers to Curious Questions

Why do investors use stock indices as benchmarks?

Stock indices provide a snapshot of the overall market or specific sectors, allowing investors to compare their portfolios' performance against a broader market.

What is the difference between a price-weighted and a market-cap-weighted stock index?

A price-weighted index, like the DJIA, is influenced by the price of the stocks in the index, while a market-cap-weighted index, like the S&P 500, is influenced by the size of the companies.

How can investors use stock indices in passive investment strategies?

Investors can invest in index funds or ETFs that track the performance of a specific stock index, allowing them to mirror the performance of the broader market.