A stock index is a collection of stocks that represents a broader collection of all stocks. For instance, the Dow Jones Industrial Average, or The Dow, for short, is 30 stocks that collective broadly represent the overall economy and are used to show what the collection of stocks may have done from one trading moment to another. The three main Indexes that are closely followed within the United States are:
- The Dow Jones Industrial Average (The Dow)
- The Standard & Poors 500 (The S&P 500)
- The Nasdaq
The indexes are collections of stocks. For instance, the Dow has 30 components. And, when one stock moves up, all else equal, the Dow would move up in value. It is important to point out that the Dow is 30 different companies. But, it is not 30 different stocks. Instead, the Dow uses a weighted amount of the various component companies. This amount is changing from time-to-time and also the companies that are included in the index change ever so often.
These indexes are thought to broadly represent the overall US economy. And, instead of following the 500 individual stocks in the S&P 500, using the index as a quick method allows someone to get a good sense of what price movement the individual indexes have done via the price movements of the individual stock within the components.
How Are Stock Indexes Used
Stock indexes can be important, if simplified, measuring sticks for the broader economy and then investors’ perception of how the economy is performing. But, stock indexes often are lagging economic indicators. Getting ahead of the curve and seeing the economy before the moves in stock indexes, whether they are up or down, will empower an investor to really launch their portfolio. And, Seeing the Economy Through The Trees is an important first step in empowering an investor.
If you are at the level of stock market for beginners – how to invest in stocks, you can learn more about what it takes to pick winning stocks in the stock market.