What Is a Stock Index and How Can It Help Me?


Finding information about a stock is simple. All you need to do is pick a company, find their stock symbol (or ticker symbol), go to your favorite finance site, and search for that symbol. Within seconds, you’ll see how they’re currently performing, how they’ve performed over the years, and other information you might not even find necessary.

Finding information on hundreds of stocks at a time, however, seems like a pretty daunting task. While plenty of sites let you follow hundreds of symbols in a virtual portfolio, sifting through all that information takes too much time. Plus, when you’ve finished looking through each individual company, the stocks you first researched aren’t even at the same value anymore.

This is why stock indices (plural of “index”) exist. Sure, you could look up the performance of each individual stock to gauge how the market is doing, but stock indexes let you see the average of hundreds of stocks at once, giving you a bigger picture of what to expect.

A stock market index (or stock index) is an average value of selected stocks used to indicate how a certain market is performing.stock-index-1

The average of a handful of companies can be used to indicate whether most stocks in their sector are up or down.

There are hundreds of stock indices, used to show everything from how a country’s top companies are doing to the value of the energy sector.

Flickr/SMelindo
Flickr/SMelindo

There a stock index for the 500 top companies in America. There’s an index for oil and gas companies. There’s even an index for renewable energy companies.

The S&P 500 index, for instance, shows 500 American companies that are leaders of their respective industries.

dennizn / Shutterstock.com
dennizn / Shutterstock.com

If these are some of the top companies in America and they’re all doing fairly well, then it’s safe to infer that the American market is doing well, too.

The Dow Jones Industrial Average (or the Dow) follows 30 stocks from major companies like Coca-Cola, Apple, and Exxon-Mobil.

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Venturelli Luca / Shutterstock.com

The average value and performance of these stocks is used to indicate how the American economy is doing as a whole. When people refer to the market and its ups and downs, they often refer to the Dow index.

The Nasdaq 100 is another popular index. It’s composed of the 100 most frequently traded companies on the Nasdaq exchange.

stock-index-5
Stocksnapper / Shutterstock.com

The Nasdaq index can also be used to interpret the current American market. However, it does not include stocks from the financial sector, unlike other indexes.

You can invest in the companies traded on these indexes — or you can invest in the indexes themselves.

Shutterstock
Shutterstock

All stocks listed in an index are publicly traded, which means you can buy stock from any of their respective companies right now. You could also buy index funds, which are funds that buy stocks on a specific index and effectively let you invest in a small percentage of each of those stocks. They’re not managed by the company overseeing the index, but their gains and losses directly mimic those of the indexes.


Many things can influence a stock index and its stocks. If demand goes up, a stock can go up in price (and vice versa). If a major event negatively impacts an entire business sector, then the market could and often does reflect negatively as well.

Historically, the stock market increases over time, as do stock indexes. This is why people buy stocks when indexes are down. When indexes go back up, they will make a profit on their original investment. Since you can’t predict the future, however, you never know when indexes will go back up…or keep sliding.

Share this knowledge with your friends below, and help them learn how to read the stock market!


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