Stock market indexes provide information about changes in stock market value over time.
Stock market indexes track the performances of groups of stocks. The three most widely used indexes in the United States are the Dow Jones Industrial Average, which consists of 30 blue-chip stocks; the NASDAQ Composite Index, which focuses on technology companies; and the S&P 500, which is an index of 500 of the largest companies in the U.S. that is issued by Standard & Poor's. Understanding indexes allows you to measure the stock market's overall performance so that you can make investment decisions.
Instructions
1. Check news reports to see if each index is trending up or down. You can use cable news channels and Internet sites such as Yahoo! Finance, MSN Money, Fox Business and CNBC, as well as the websites that Dow Jones, NASDAQ and Standard & Poor's publish which feature their indexes.
2. Research how each index is calculated. The Dow Jones Industrial Average, which is most commonly referred to in the media, is the sum of the value of 30 blue-chip stocks divided by the Dow Divisor, which is a number that Dow Jones created to account for factors that can affect a stock's price, such as stock splits. The S&P 500 provides a broader scope of stock performance than the Dow because it contains 500 stocks as opposed to 30. The NASDAQ Composite Index is the largest electronic stock market in the United States. It largely includes stocks of technology and growth companies (businesses which tend to have strong earnings and high profitability ratios).
3. Check the performance of the specific stocks in which you have invested. Tens of thousands of stocks are publicly traded stocks in the U.S., and an index is just a composite of a select group of stocks. Remember that just because an index goes in one direction, it doesn't mean that all stocks inside and outside the index are going in the same direction.
