What is a Stock Index?

When you watch the news and they start giving updated stock financial updates, you probably see a bunch of numbers you don't understand. When they tell you how the market is doing, they usually will give you figures of stock indexes.

An index of the stock market is a measurement of the stock market's performance. It will show you how the stock market is doing as a whole. For example, if an index increases in value, you can understand that the stock market has generally gone up.

There are many different indexes, but the two most common that you will see quoted are the Standard & Poor's 500 (S&P 500), and the Dow Jones Industrial Average (DJIA) often referred to as "the Dow".

Each of these are calculated in different ways. They have varying weights from index to index. For example, the Dow is price-weighted. It includes 30 large corporations. Price-weighted means that the larger the price of the stock, the more weight that has in the calculated average of the index.

Other indexes include different numbers of stocks. For example, the S&P 500 includes 500 different stocks. Others are market-value weighted or capitalization-weighted.

Indexes are used to see how the markets are doing as a whole and are used to measure an individual stocks performance against. When you understand them, you can better research individual stocks.