How to read the stock market index
|May 22, 2012||Posted by John Border under Stock Market Explained|
I can understand the dilemma that you will have as an investor whereby you hear about the Dow Jones jumping up by say 2% to a particular amount but when you see your individual stock it may not have not risen that much or may even have fallen down.
So, let us first talk about the big indices in the US stock market
Dow Jones – It tracks 30 stocks
NASDAQ – It tracks 100 stocks
S&P 500 – it tracks 500 stocks.
Now each of the 30 stocks in Dow may have a different weightage and that will mean that some stocks may have more weightage than the others. As an example say Apple stock rose 5% in a trading day and has a good amount of weightage in the Dow Jones. The effect that it will have is that you will the Dow Jones rising in the day however it may so happen that some other Dow Jones stock , let us say Wal-Mart may not have risen that much. Or you may be interested in a stock which is not there in the Dow Jones 30 list.
So then the question is how do you read the index and the first and foremost thing that you need to know about the index is that it is an indicator of the overall market direction and that it will tell you how the market sentiment is working on a day to day basis.
This gets compounded by the fact that a lot more people look at the index and then make a buy or a sell decision which effectively means that eventually the market index becomes a barometer of the market.
How it gets reported
When the market analyst says that market rose 2% yesterday all that is being said is the if the Dow Jones index was 12448 at market opening time then now it is the market close about 12696.96 .
Same holds true for the NASDAQ and the S&P 500.
How does it help over the long run
In the long run it gives an historical perspective on the market and you can compare a time in the past to the present to see how much the market i.e the index has risen. That percentage increase you can compare with the stocks to see if you were able to beat the market or not.
There are people who do not want to invest in the stocks individually but just invest in the overall index so then they should read my post on how to invest in the index.