How to Read Stock Market Indices
Stock market indices provide a useful way to get broad information on how the overall market is doing. Increases in them represent increases in the overall market. Additionally, the various market indexes can provide insight into how quickly or slowly the market are moving. They can also provide a good benchmark for comparing investment performance.
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Instructions
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Review the various market indexes to correctly understand what they cover. For example, the Dow Jones Industrial Average is an index of 30 large US companies, while the S&P 500 covers 500 large US companies. The NASDAQ, on the other hand, is an index of only stocks traded on the NASDAQ exchange.
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Understand that indexes are not denominated in dollars. A market index is used by creating a starting value when the index is developed. The changes from that value are calculated on an ongoing basis according to the movements of the stocks that make up the index.
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Read stock market indexes by comparing them to previous index numbers. If you are interested in what the market is doing, comparing the current value to a previous value tells you about the market overall. If the current number is higher, the market is up over that time period. The difference between the two numbers expressed as a percentage tells you how much the market is up over the time period.
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Compare the rate of change in two index numbers with the change in value of an investment over the same period of time. If the investment's change expressed as a percentage is higher than the market index's change as a percentage, then that investment can be said to have outperformed the market. If the opposite is true, then that investment underperformed the market.
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Tips & Warnings
Use an index that contains stocks with similar features to investments you wish to compare against them. There is little value in comparing a giant US oil company against an index that is comprised of small foreign technology stocks.
Past performance is no guarantee of future results. Indexes can and do behave much differently than individual securities.
