A Market index refers to a hypothetical Portfolio with investment holdings representing a segment of the financial market. The index value is determined by the prices of the Underlying holdings. Few indexes have values which are based on market-cap weighting, Float-weighting, revenue weighting and fundamental weighting. The term ‘weighting’ is a method of adjusting the impact of individual items in an index.
Furthermore, investors keep following different market indexes to understand market movements. The three most popular stock indexes to track performance in the US market are the Dow Jones Industrial Average (DJIA), S&P500 and NASDAQ Composite Index. Investors are not allowed to invest directly in an index, therefore these portfolios are used as benchmarks for developing Index Funds.
Each market index has its own methods which are calculated and maintained by the index provider. These methods will typically be weighted by other price or market caps. Investors use market indexes in order to follow the financial markets and also manage their investment portfolios. Indexes are deeply intertwined in the investment management business where funds are used as benchmarks for performance comparisons and head managers use them as a Basis of creating investable index funds.
Each individual index has its own methodology for calculating an index value. Weighted average mathematics is primarily the basis for index calculation. This is because the value is derived by removing the weighted average calculation of the value of the total portfolio. Price weighted indexes will be more affected by changes in holding with the highest price, whereas market capitalisation weighted indexes will be most greatly impacted by changes in the largest stocks and so on.
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Some of the markets leading indexes are mentioned below:
Remember that investors often use index Investing in place of individual stock holdings in a diversified portfolio. Investing in a portfolio of an index can be a great way to increase returns with the balancing risk. Investors may also choose to use market index funds to invest in growing sectors.