Market Index

  

Categories: Metrics, Marketing

The Dow. The S&P 500. NASDAQ. FTSE. MSCI. They're all market indices.

Why do we even have these things? Well, we want to know, quantitatively, how well or poorly the market is doing. The indices get tracked and managed a bit. Like...if you're the index manager of the S&P 500, what do you do when AAPL buys one of the companies inside of that index? You have to replace that bought company with an equivalent value of an equivalent company, right? Well, how do you figure out where to look or what to put in its place?

Eh, you guess. You poke around. You look at trading volatility and industry sector and globalness, and think about the future in one form or another.

See: Index Funds. See: Exchange-Traded Funds.

Related or Semi-related Video

Finance: How Do You Judge the Performanc...132 Views

00:00

finance a la shmoop. how do you judge the performance of an index fund? very

00:07

carefully. actually performance means something very different when it comes

00:12

to an index fund versus an actively managed fund. in an index fund the

00:16

manager doesn't really do anything per se other than rebalance the indices so [man sleeps at a desk]

00:21

that they conform to whatever the product was that you bought in the first

00:24

place. for example a technology index fund might claim that 12% of its

00:28

holdings will have wireless telecommunications related stocks as a

00:32

target, but never less than 10% and never more than 15% .and in most cases the

00:37

actual stocks that go in the fund are identified beforehand like before the [man smiles at camera]

00:40

funds actually really launched. and the relative weightings of those investments

00:44

is also predetermined .ie the fund might target having three percent of its total

00:50

as shares in Verizon. but if Verizon suddenly does extremely well and doubles

00:54

in price in a short period of time well the index fund might have to sell

00:59

shares of that stock so that it's weighted holding amount won't pierce the

01:03

maximum weighting of 15%. but all this relates to the composition of the fund [pie chart]

01:07

not necessarily the performance. since an index fund is a reflection of a given

01:12

area like these examples they conform to a general theme, like the Vanguard total

01:17

stock market index. the broadest based reflection of the overall market. like

01:22

the S&P 500 plus Nasdaq plus the New York Stock Exchange indices or another

01:27

one might be the Vanguard small cap Value Index, largely companies under a

01:33

few billion bucks in market cap which trade at relatively low price to [value index listed]

01:37

earnings ratios ie they are value stocks rather than say growth stocks. all right

01:42

next one might be the Vanguard emerging markets stock index. that one's all about

01:48

third world countries trying to become second worlders how's that Nigerian

01:52

oil exchange looking? or what about investing in Vietnam these days? the

01:56

Napalm is mostly washed away by now. and then move it on. yep there's the Vanguard [sink with the water on]

02:01

intermediate term bond index, and yes there are bond index funds as well.

02:07

intermediate just means that the bonds in this set of bonds mostly come due

02:11

within about five years or so. the bottom line is that an index fund

02:15

isn't really a managed fund. it's just a reflection of whatever group of stocks

02:20

or bonds it is supposed to reflect. so if an index performs poorly, all of the [man holds stock]

02:25

fault lies in the one who chose that particular index fund, not the manager of

02:30

the fund because well there basically wasn't one, so if your fund as poorly and

02:34

you want to scream at the idiot moron financial manager who screwed up your

02:38

retirement by picking a bad investment vehicle ,well go find a mirror. [woman grimaces and cries]

Up Next

Finance: What is the S&P 500?
45 Views

What is the S&P 500? It's Standard & Poor's 500 generally largest companies, with a U.S. domestic bias. The S&P 500 is usually what investors think...

Finance: What is a Country Basket (Index Fund)?
30 Views

What is a Country Basket (Index Fund)? Investing internationally can be a challenge, as foreign exchange, different accounting rules, time zones an...

Finance: What's the Difference Between Mutual Funds and Index Funds?
121 Views

What is the difference between mutual funds and index funds? Mutual funds are professionally managed. Those investors trade shares and realize taxa...

Find other enlightening terms in Shmoop Finance Genius Bar(f)