Index Investing

More than five thousand stocks trade every day on the New York Stock Exchange and Nasdaq  – the two largest stock exchanges in the U.S. With so many stocks moving and up and down throughout the trading session – and not all in the same direction, either – how is it that people can say whether the market has had a good day or a bad day?

It turns out, when people talk about the stock market’s performance, they are referring to a market index, such as the Dow Jones Industrial Average (DJIA), commonly called “the Dow,” or the Standard & Poor’s 500 – or S&P 500 for short. Each stock index measures the value of a unique section of the stock market. Some indexes measure very few stocks; the Dow, for example, is made up of just 30 stocks. Others contain thousands of stocks – 4,000 in the case of the Nasdaq Composite. 

Indexes provide a way to measure overall market sentiment, and investors can track changes in an index’s value over time and use it as a benchmark when evaluating their own portfolios. The S&P 500, for example, is the most commonly used benchmark for evaluating individual portfolios – as well as the overall economy of the U.S.

In this tutorial, we’ll take a closer look at some of the major stock market indexes and explain how you can invest in the stock market using index funds. (Need a stock market and mutual fund refresher? Check out our Stock Basics Tutorial and Mutual Fund Basics Tutorial before reading on.)