We hear “stock index,” and we ask the question: What is an index? Well, it’s really just a measure of how the overall stock market is doing. It is a benchmark, something we can use to compare our investments to. But, not every index is created equally.
One of the ones that we hear so much about is the Dow Jones Industrial Average. It is one of the oldest, but it’s a very simple index. It’s popular in the media, but it only represents 30 companies—30 big U.S. companies. It started with one share of each of those 30 companies. It has changed through the years. IBM now represents the biggest portion. So, it’s not the best measure—not the best one to look at.
A better one would be the S&P 500, because it’s 500 companies. They are weighted by the size of the company. It’s much better, but it’s still just large companies.
We can also get information on NASDAQ. That’s all the companies listed on that exchange. It’s very heavy in technology and in small companies.
The Russell 2000 is made up of more than 200 stocks and includes large and small companies. So, it’s a better measure of the overall market movement.
You can buy a fund that tracks an index: a mutual fund or an exchange traded fund (ETF). There are several out there.
DIA, or we call it the Diamonds, tracks the Dow Jones Industrial Average.
SPDR, the Spiders, tracks the S&P 500.
QQQ, the Qs, tracks the top 100 of NASDAQ. It includes—one of its biggest portions—is Apple and Amazon and eBay.
So, if you’re not sure which of those companies to pick, then you can choose an index.
Every country has some index that helps it to track and measure how the overall market is doing: DAX in Germany, FTSE in England, NIKKEI in Japan. So, we have to remember that yes, an index is a great benchmark and tool to compare our performance, but not all indexes are created equally.