What is a stock index?

What is a Stock Index?
The term "stock market" is used very loosely to describe the overall stock trading world. When we hear about the performance of the stock market being good or bad (or up or down) what people are really talking about are certain indexes within the stock market.

In short, an index is a group of similar stock whose performance is measured statistically and is then reported as a representation of that particular market. Technically anyone could create an index if they decided to group companies with like economies together and measure their stock performance. Originally, calculating whether or not the market was on the rise or the fall was to take the average performance of all the stocks in an index and compare it to previous index measurements. Now the equation is more complex. Index managers used what is called market capitalization. Market capitalization is a measure of the company's total value which is determined by multiplying the number of outstanding shares by the current market assigned price of each share. Market Capitalization is now highly computerized so calculations can be done much more rapidly and more frequent. In fact most results are almost exactly in sync with market changes.

The Top 5 Key Stock Indexes:

• The Dow Jones Industrial Average (The Dow or DJIA) - This index was the first index created. Charles Dow was the creator. In 1896 The Dow started out with 12 companies. Now it contains 30 of the largest U.S. companies. The DJIA is the most recognized index in the world. When investors refer to "the market" they are usually talking about the Dow Jones Industrial Average.
• The Nasdaq Composite Index (The Nasdaq or NASD) - The surge of technological breakthroughs has made the Nasdaq one of the most popular. The NASD was created in 1971 and currently includes 4,000+ companies. The Nasdaq is technology driven and handles heavily in internet stocks.
• The Standard and Poor's 500 Index (S&P 500) - The S&P includes a wider spread of companies across many different U.S. markets. The S&P is very diverse and is therefore one of the best indicators of overall market performance. One disadvantage is that only a relative few companies comprise most of the index's worth. So the value assumed for each company is more difficult to discern.
• The Wilshire 5000 Total Market Index (TMWX) - Often referred to as the "total market index" because it contains 6,500+ stocks, the TMWX was created in 1980. The Wilshire 5000 covers most of the public companies in the United States. Index funds for the Wilshire are available but at a high price.
• The Russell 2000 Index (Russell 2000) - The Russell 2000 was created by the Frank Russell Company in 1972. It contains 2,000 companies. The Russell 2,000 is actually the smallest company stocks in the Wilshire 5,000. This index is a good choice if you are looking for rapid growth among small companies.

When you decide to invest in indexes, remember to keep in mind that different indexes weigh their value differently. The numbers themselves can be deceptive. You also want to be careful to keep in mind that some companies in an index are going to be considerably more influential and lucrative. Don't let the big players in the index skew your perception of its performance. Remember that the Nasdaq is the most volatile of the indexes but along with risks there comes considerable advantages. Whatever your decision never forget that investing requires constant management and that although indexes provide the advantage of having already grouped like companies together, researching those companies individually will give you a better picture of what is really happening in the market.