What is a Stock Market Index and Average?

stock market index

If you have invested directly in a specific stock, you more than likely know how to look up that stock and see how it is doing.  You can see things like the current price it is trading for,  what the price was when the market closed the night before, or the volume or number of shares that have been traded.  

At the most basic level, a stock market index or average is a simple way to measure changes and performance in a specific group of stocks rather than individual stocks like the ones you might be invested in.

The most well known “average” is the DJIA or Dow Jones Industrial Average.  Originally the DJIA was made up of 30 large industrial stocks and the average was calculated by adding up the price of all the stocks included in the average and dividing that by 30.  The process is still the same, but the divisor has been adjusted multiple times over the years.

When someone asks, “How is the market doing today?”, they are usually referring to this group of blue chip stocks.

Component Stocks of the Dow Jones Industrial Average*
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Similar to a stock market average, a stock market index calculates averages, but just not against the largest, blue chips stocks. Indexes group stocks together by theme or industry. Bundling them all together allows investors to broadly track securities or stocks as easily as they could a single stock. When the index goes down, that means on average the stocks in the index are down. Of course there will be individual stocks in the index that could be up when the overall index is down, but that isn’t the norm.
The S&P 500 or the Standard & Poor’s 500 Index is the most well known index today. This index is composed of 500 “blue chip” stocks all separated by industry. Almost every key industry is represented by the S&P 500.
Here are a few more key indexes you should be aware of:
  • NASDAQ Composite Index
  • NYSE Composite Index
  • Wilshire 5,000 Total Market Index
* As of August 31, 2020

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