Home Featured What You Should Know About Indexes

What You Should Know About Indexes

What You Should Know About Indexes

By Kim Clark
From Kiplinger’s Personal Finance
Today, there are an estimated 3 million indexes that provide benchmarks against which to measure investment performance and serve as recipes for the portfolios of a vast number of indexed mutual and exchange-traded funds.
Here’s a quick summary of some of the most common indexes. Most weight their members based on market value, calculated by multiplying the stock price by the number of outstanding shares.
Large-Company Stocks

The S&P 500 index, launched in 1957, represents about 80 percent of the dollar value of the U.S. stock market. Though it tracks 500 firms, the index contains 503 stocks because a few members, such as Google owner Alphabet, issue more than one share class. The stocks are chosen by a secret committee convened by the owner of the index, S&P Dow Jones Indices. Committee members select generally large—but not necessarily the largest—U.S.-based firms they believe best represent the overall market while trying to keep changes to a minimum.

The Dow Jones industrial average, the granddaddy of market barometers, was created by Wall Street Journal founder Charles Dow in 1896. It is now also managed by S&P Dow Jones Indices, where a committee handpicks…

Read more…