An index is a financial instrument that is used to measure change in a certain segment or aspect of the market. There a certain global indices that are often referenced by investors namely the Dow Jones Industrial Average , NASDAQ, the S & P 500 and for the purpose of the South African market the JSE Top 40 Index .These indices are referenced and used as an indicator to see if the market is down or up, this is because indices show what changes have taken place in the market. In this article we will be discussing what these respective indices track and how they can be interpreted.
How indices are read :
Before we explore what each index tracks we should discuss how each index are read. Indices are measured in points and in an currency. Therefore when the market opens the index will measure of certain points. For example the Dow Jones may be at 14 000 points and when the market closes it may close at 14 050 points. This increase will be recored in a percentage as a 0.36% increase in the Dow Jones. Without being to technical or complicated, all you need to understand is that the points are calculated on the weighted average market capitalisation of the stocks that are being tracked by the respective index. Therefore each index can range drastically in how many points it consists of.
Dow Jones Industrial Average :
The Dow Jones Industrial Average is a stock market index that tracks the performance of the 30 largest companies in the United States in America. This index is used as a benchmark by many investors to assess the market as well as compare the performance of their own investment portfolios. If the Dow Jones index drops in points, this is an indication that the market is down and if the index is up it is an indication that the market is down. The idea behind using an index is not look at its day to day performance , but rather to look at its overall trend, so you can use this as a metric to measure the overall performance of the market.
NASDAQ Composite Index:
The NASDAQ Composite Index also like the Dow is a stock market index , that tracks a certain segment of the market. The NASDAQ Composite Index focuses on information technology companies which are based in the United States. It is a good index to track companies that operate in the tech space such as Apple, Google and Microsoft. These companies are also included in the Dow index tracking.
S & P 500
The S & P 500 is also similar to the Dow and the NASDAQ in that it is a stock market index which tracks a certain segment of the market. The S & P 500 tracks the 500 largest companies in the United States. This index gives a broad gauge of the market and used as bench mark usually to assess the overall performance of the whole market. In comparison to the Dow , the S & P covers a larger range of companies generates a broader perspective of the market.
JSE Top 40
This index is more specific to the South African market ,unlike the other three indices mentioned above it does not relate to companies established in the United States. This index tracks the top 40 South African companies that are listed on the JSE. This market is perhaps the most important of the four discussed in this article because it allows us to compare the performance of the South African market to the performance of other markets. In addition to this the index provides an indication of the market environment how to position your investment portfolio accordingly.
The nature of indices is comparative. You are truly only able to reach consensus and confirmation of the market by evaluating different indices in comparison to each other. For example if you have the Dow and S & P 500 both indicating and uptrend in the market , that is a stronger conformation that the market is bullish. An index can be used as an indication of the market condition, but they are not a guarantee of the market environment. A market index still has its limitations as a it only gauges a certain segment of the market, and therefore can never be a true representative of the whole market, and that should also be taken into consideration.