What is Index?
Indexes provide a collective view of the stock market. Indexes provide a larger picture compared to the individual stocks which provide a more in-depth summary of the stock market.
Indexes are basically a weighted average of the stocks that allows people to measure the performance of various companies, the economy, or a certain industry. Many indexes are created on the market capitalization of a company. Market capitalization is the number of shares outstanding in the company multiplied by the price per share. When finding the weighted average of many companies, companies with larger market capitalization have greater impact than those with smaller market capitalization.
Dow Jones
Dow Jones was the first index published in 1896. It was published after a financial reporter Charles Dow added up the largest 12 stocks and divided it by 12 to get the Dow Jones Industrial Average. Dow Jones consists of 30 of the most successful companies in the United States hand-picked by experts created to help track the performance of the American economy. Even Nowadays, 30 companies make up the DOW and their share prices are used as an index, or a benchmark that helps companies to track their performance and compare it with the market’s performance.
Dow Jones is differently impacted by companies that have different weights based on their market capitalization. Companies that have more weight and importance in their stocks will affect the Dow Jones more compared to companies that have lower weight in their stocks. DOW is one of the many key indicators of the performance of the U.S. economy alongside G.D.P., employment rates, and treasury interest rates.
S&P 500
Meanwhile, many economists and experts claim that S&P 500 outperforms the Dow Jones. S&P 500 is an index that measures the performance of 500 the top publicly traded companies in the U.S. S&P 500 is regarded as the best gauge of American equities and the overall stock market. The S&P 500 was launched in 1957 by the credit rating agency Standard and Poor's, and you can invest in one of S&P 500’s funds, but not directly. The weight of the companies in S&P 500 is also determined by the market capitalization of a company.
NASDAQ
Nasdaq is also an index that is widely used. Nasdaq includes approximately 3,000 companies that are traded on the Nasdaq Exchange. While Nasdaq includes small companies, they also include large technology companies such as Google, Amazon, and Apple. As Nasdaq consists of domestic and international companies in the tech industry, Nasdaq is considered a strong indicator of the technology industry.
Nasdaq performance can be volatile because it is composed of volatile technology companies, which often experience sudden price fluctuations. While you cannot invest in Nasdaq directly, you can invest in exchange-traded funds (ETFs) or mutual funds that follow the performance of Nasdaq.
Final Thoughts
In my opinion, investing in an index through ETFs or mutual funds is a great way to minimize risks. This is because even though one company’s stock goes down, there are still other companies that are doing well. Investing in a basket of stocks through index therefore, is a great way to balance out the gains and losses.
This is why it would be great for teenagers like us. As teenagers are not experienced with the stock market and don't have much time to invest in studying individual companies, an index is a great way to start learning about stocks and to gain profit. Also, ETFs following the S&P 500 tend to increase in the long run. Therefore, teenagers who can invest in long-term can start investing (even small amounts are okay!) right now to gain a lot of profit in the future.
In future posts, I will write about how we can maximize profits and returns with the index. Also, we will track the performance of different stocks and ETFs that follow the different types of index to determine how we can earn more profit.