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Confusing stock market lingo

What's a stock market index?

by Single Ma  |  1256 views  |  0 comments  |        Rate this now! 

You’ve probably read in a Personal Finance book: “It is better to invest in an index fund than individual stocks.” Or as of late, you may have heard someone scream, “The index dropped XX points!” Did you know what they were talking about? Ever wondered what the heck is a “stock market index?”

Well don’t fret. From the Nuru PF deck, here are “Indexes You Should Know About.”

1.) The Dow (Dow Jones Industrial Average). A listing of 30 of the most influential companies in the US, including Home Depot and Microsoft. When “the Dow is up,” the collective stock performance of those 30 companies “is up.”

2.) S&P 500 (Standard and Poor 500). An index of 500 of the most frequently traded stocks in the market. It is what experts use to gauge the performance of the overall “market.” If the S&P is doing well, it’s fairly safe to say the economy is doing well.

3.) Wilshire 5000. An index that attempts to measure the performance of all publicly traded US stocks. The most comprehensive index available, the Wilshire 5000 is often used to represent the market as a whole.

4.) Russell 2000. An index that consists of 2,000 small-cap firms. A small-cap firm is one whose market capitalization (the number of stocks the firm has issued times the value of each stock) is relatively small (under 1 or 2 billion dollars).

5.) NASDAQ Composite. Consists of all funds that trade on the NASDAQ (more than 3,000 securities). Because it’s heavily listed in technology accounts, the Nasdaq Composite doesn’t adequately represent the market as a whole, though it’s a good indicator of the tech industry.

I’m sure many of you knew this basic information already, but we don’t hear about the Russell 2000 or Wilshire 5000 too often. And it’s also important to note that companies are added and removed from the Dow periodically. Of the 12 original companies included in the Dow when it was first created in 1896, only one remains -- General Electric.

About the Author

A working (single) mom and author of the personal finance blog Fabulous Financials @ http://fabulousfinancials.com

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