Understanding Stock Market Indexes: A Beginner's Guide

Stock market indexes are used to get a quick picture of the overall movements of the market. There are many different indexes published, but a few major ones dominate most investor's attention. The Dow Jones Industrial Average--usually called "the Dow," the S&P 500, and the NASDAQ Composite index--are the most reported stock market indexes.

Step 1

Understand what the index covers. To read it, it's important to know what the index covers. The S&P 500 index, for example, covers large United States stocks, while the NASDAQ composite covers only stocks traded on the NASDAQ exchange.

Step 2

Understand the numbers. Stock market indexes are weighted averages of the composite values of the stocks within the index. As such, market indexes are generally most useful when compared to previous index values.

Step 3

Read the change in the market index as a percentage not a dollar amount. Thus, a movement from 8500 to 8800 represents a 3.53 percent change (300/8500).

Step 4

Compare market index numbers to other times for relevant comparison. Comparing the market index value to the value from one year ago gives an idea of the market performance for a 1-year period. Comparing the market index value to the previous low gives the performance of the current uptrend.

Tip

There are many indexes beyond the standard market indexes. Use these indexes to determine performance of smaller sectors such as technology stocks, or oil stocks.

Warning

You cannot directly invest in an index. Mutual funds and other investments only track indexes by investing in similar--but not exact--securities and amounts.