I hope you're all staying safe and covering each others backs. - Manuel
I hope you're all staying safe and covering each others backs. - Manuel
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What is a Stock Index? Why do Investors use Stock Indices?

According to our textbook, on page 94, an index compares the current price behavior of a representative group of stocks to a base value set at an earlier point in time. Another way to look at indices is to help investors benchmark how certain sectors or groups of companies are performing over timedepending on what the index covers (J. et al., 2016). 

For example, the Dow Jones Industrial Average (DJIA) only focuses on 30 large, well-respected company stocks. This DJIA index comprises companies from various sectors, including banking, energy, technology, health care, transportation, and others—which helps the index represent a broad sample of the U.S economy. Finally, the DJIA is a price-weighted index, which means that stocks with higher prices per share get more weight in the index than the stocks with lower prices per share (J. et al., 2016). 

The next generally well-known index, the Standard & Poor 500 stock index, is primarily based on 500 large companies in the United States. Interestingly, the S&P 500 is a market-weighted index, which means it’s calculated by multiplying the stock price per share by a company's outstanding shares, which is also a measure of market capitalization (J. et al., 2016). 

Due to this methodology, some investors feel that the S&P 500 provides a more representative overview of the general U.S market conditions than the Dow Jones index. Since the S&P 500 largely measures market capitalization, which refers to the total value of all a company’s shares of stock, I think that this index would be a great indicator for a growth portfolio; to elaborate briefly, a growth portfolio focuses on investing into stocks that increase in value over time and selling their shares to realize a capital gain (J. et al., 2016). 

References 

J., L., B., S., & D., M. (2016). Fundamentals of Investing, Global Edition. 

 


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