A common and effective way to gain perspective on stock price fluctuations is to compare the movement of your stocks to that of indices or market indicators. About 100 years ago, as the number of individual stocks grew, the need to measure how the stock market performed became obvious. In 1896 The Dow Jones Company took groups of stocks and averaged their prices to create the first indices, the Dow Jones Averages. They created four different indices: one for industrial companies, one for utilities, one for transportation companies and a composite that included the three other indices.
In the 1920s, Standard & Poor's Corporation (S&P) created separate indices. These indices also measured the market as a whole in addition to some sectors of the market. In 1957, when technology enabled the companies to start calculating their indices on an hourly basis, S&P created the S&P 500 Index, which measured the performance of a larger proportion of the market compared to the more popular Dow Jones Industrial Index.
Over the years, the S&P and Dow Jones indices have remained popular, leading both companies to create other indices. In addition, other companies and even the exchanges themselves have created more indices.
Different indices are calculated in different ways. Few remain as simple averages. An index moves when the stocks in it move. When a stock in an index goes up or down, so does the index. Hence, when you hear that the Dow Jones closed at 10,500, down 20 points for the day, it means that the average of the prices of the 30 stocks that comprise the Dow is 10,500 and the combined value of these 30 stocks (as calculated by the index) dropped 20 points during that day's trading.
Calculation method aside, all indices measure the performance of the stock market or some subsection of it on a continuing basis throughout each trading day. By tracking an index, or a variety of indices, investors can quickly gauge market trends that may impact investment decisions.
What is the point of following the indices when what you care about is your own stock portfolio performance?
Indices often reflect trends in the market and in the economy. Watching overall market performance can be the key to making smart decisions about your individual investments. For example:
1) Indices can function as benchmarks to compare the performance of the stocks you own against the market in general.
2) Comparing today's market movement with similar market movements from the past may help you become aware of trends, and the best times to buy or sell.
You may want to create an index of your own stocks so you can measure your own investments against the performance of the more established indices.
There are a couple of ideas to keep in mind when analyzing indices. First, the percentage move is often more meaningful than the move in points. It means a lot more when the DJIA moves 50 points if it is at 1,000 than if it is at 10,000. Second, while individual stock prices, at least for the time being, are generally expressed as fractions, indices are displayed in decimals.
Author Resource:-
Martin Chandra is a full-time investor. He has been researching investment strategies and make his own living. For more information please go to here.
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