The market index is a weighted average of the values of a basket of stocks.
As the stock market continues to rise, more and more people are asking why we compute market index. The answer is fairly simple, but it’s important to understand how the index works before we can fully understand why it’s important. A market index is a weighted average of the values of a basket of stocks. In other words, an index takes a bunch of stocks and weights them according to their value in order to come up with an overall figure for how well the stock market is doing.
The most common example used for this purpose is the Dow Jones Industrial Average (DJIA). The DJIA has been calculated since 1896 and consists of 30 large-cap US companies that are selected by editors at Dow Jones & Company. These companies are then weighted according to their stock prices and trading volume, with Apple Inc (AAPL) being worth about $195 billion, Microsoft Corporation (MSFT) valued at $859 billion, and Exxon Mobil Corporation (XOM) coming in at $357 billion.
So why do we compute market indexes? Because they provide investors with valuable information about what’s happening in the stock market. They also allow investors to compare different markets over time and across countries. For example, if you wanted to know how well Canada’s stock market was doing compared to that in Germany or China, you could look up their respective indexes on Google Finance or Yahoo Finance.
