Market Basket

Imagine an Easter basket: a bunch of candies and colored eggs all collected and lumped together. It doesn’t have all the candy or all the eggs...but an extensive enough sample to give you a stomachache (just as any good Easter or Halloween should end).

A market basket works in a similar way. It presents a selected group of securities meant to stand in for a particular part of the market. If you want to see how the pharmaceutical sector is doing, you don't need to look at how shares of every drug maker are performing. You can pick a few bigwigs and important players.

This process underlies the idea behind market indexes. You don't need to look at every stock trading on Wall Street. Instead, look at how the S&P 500 is doing, a basket of the 500 most important publicly-traded firms.

The idea of a market basket comes up in economics as well. For instance, inflation measures, like the consumer price index (CPI), don't track the prices of every item anyone has ever bought. Instead, the government picks a representative sample...a basket of items chosen to provide a close approximation of the general inflation situation.