Stock Market investing for beginners - What is a Stock Market Index?
Filed Under Stock Market Basics, Stock market index |
Another major component of understanding the stock market is getting to know what the stock market index is and how its movement signifies the trend and how it can be help you trade in the stock market.
Of course you would have heard stories about the 1929 crash or the 1987 stock market crash and it being called the Black Monday. On that day the stock market index called the Dow Jones Index plummeted by 22.6% and shed 508 points.
What is Dow Jones Industrial Average and what does it mean for you stock market for beginners investor.Does the moment reflects a loss or a gain for you and how can you earn by tracking the movement of the index.
Another name for the Dow Jones Industrial Average is DJIA or Dow 30 or simply The Dow or Dow Jones. It was created by the Wall Street Journal editor and co-founder of the Dow Jones & Company Charles Dow.
DJIA consists of 30 stocks of the largest and most widley held public companies of the United States. This in mathematicla terms is price weighted average of the 30 stocks. To calculate this the sum of all the prices of the 30 stocks is divided by a divisor. This dow divisor is actually less than one and is adjusted for any stock splits or changes occurring to the underlying 30 stocks.
So you would argue that Dow Jones is really the average of the 30 stocks only and does not reflect the whole market. Yes, correct some would argue but on other side you have those 30 stocks across industries and as widely held as possible which are more likely to give an indication of the market moods and directions and also you can compare the average historically to gain more insights into the macro trends of the market.
Several other indexes are now popular since with the advent of technology and many other exchanges. A few notable indexes among them are
NASDAQ -100, S&P 500, Russell 300, FTSE30(for theLondon stock exchange,BSE 30(India - Bombay Stock Exchange) or the Hang Seng Index(Hong Kong stock Exchange).
As you learn the stock market for beginners basics, the movement of the index would give you some idea of how the health of the economy is and how the stock market is taking it. On the other hand it may sometimes mean that even though the stock market index is rising you particular stock may not be because of lot of other factors like the industry it is in, the management of the company and how that individual company is doing in terms of the market expectations.
In this age a lot of stock market traders rely on a combination of indices like a sector specific index as well as broader index like Dow Jones or S&P 500 to track the progress of the overall market as well as the sector in which their stock is.
So as a beginner you should for now keep track of the progress of the index to gauge the market sentiment but be aware of the industry,the management,the sector your stock is in to make money by trading in stocks.
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