There’s no doubt that investing in index funds has long been considered one of the smartest investment moves you can make. In investing, an index measures the execution of a set of assets or a cart of securities like a catalog of public limited companies and their stock prices. Investors use indexes as a criterion to measure the performance of any one stock, bond, or mutual fund concerning overall performance in the market.
Just like how an index is a unit of measure in other sectors, the index rate determines the variable interest rates for a financial product. For example, a variable-rate mortgage’s interest rate depends on a particular index.
Index funds and exchange-traded funds (ETFs)
While stocks and mutual funds endeavor to surpass the market by performing better than the benchmark indexes, index funds target to mirror the broad market, rather than surpassing it.
Stocks and mutual funds frequently fail because many investors use strategies like the buy-and-hold strategy. On the other hand, index funds and exchange-traded funds (ETFs) comprise stocks that typically represent an entire index like S&P 500. The performance goes up and down parallel to that benchmark index. Since index values have a tendency to go up over time, investors look to establish long-term wealth by investing in index funds and ETFs.
The most familiar stock market indexes are The S&P 500 and the Dow Jones Industrial Average. These indexes track the vast, extensive market with huge companies’ stock movements. Other indexes may focus only on a particular industry or market sector. Here are some common indexes:
S&P 500
The Standard and Poor’s 500 is a stock market index that consists of 500 large public limited companies found in stock exchanges in the United States. The index comprises the leading companies from leading industries based on market capitalization.
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Dow Jones Industrial Average
The DJIA represents the performance of the 30 large companies in the United States. It is based on price and not market capitalization. Though it is one of the oldest equity indices, some financial experts believe that DJIA is not an adequate representation of the overall U.S. stock market because it is not as broad as the S&P 500 Index.
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Other indexes
- The Nasdaq Composite Index: It is based on the market capitalization of 3,000 or more tech companies. It includes some companies that are not based in the United States.
- Bloomberg Barclays U.S. Aggregate Bond Index: It is a broad index that comprises the U.S. bond market.
- Russell 2000 Index: It includes companies with market capitalization between $300 million and $2 billion.
- The Wilshire 5000: It is based on the market capitalization of all American stocks found in the United States with easily available price data.
