02-11-2005, 05:17 AM
<blockquote id="quote"><font size="1" face="Verdana, Tahoma, Arial" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by muqtader</i>
<br />hi there... its been heard and listened by all that the stock market is currently standing at 7000 points plus. I wanted to know what exactly does this index mean... what can we conclude about the stock market given any index. to make it further clear this index respresents the state of the market but what can an investor perceive from such statistics?
thanks. )
Muqtader Abbas Shah
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
Our trusty Investopedia dictionary tells us that an index is "a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market."
It would be too difficult to track every single security trading in the country. To get around this, we take a smaller sample of the market that is representative of the whole. Thus, just as pollsters use political surveys to gauge the sentiment of the population, investors use indexes to track the performance of the stock market. Ideally, a change in the price of an index would represent an exactly proportional change in the stocks included in the index.
Today, the stock market uses a slightly complex methodology, called price-based weighting. In this system, the weight of each security is the stock's price relative to the sum of all the stock prices. The problem with price-based weighting is that a stock split changes the weight of a company in the index, even though there is no fundamental change in the business. For this reason, not too many indexes are weighted on price.
Most indexes weight companies based on market capitalization. If a company's market cap is $1,000,000 and the value of all stocks in the index is $100,000,000, then the company would be worth 1% of the index. These types of systems are made possible by computers--most are calculated by the minute and so are very accurate reflections of the market.
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If I could... Then I would... Turn back time!!
<br />hi there... its been heard and listened by all that the stock market is currently standing at 7000 points plus. I wanted to know what exactly does this index mean... what can we conclude about the stock market given any index. to make it further clear this index respresents the state of the market but what can an investor perceive from such statistics?
thanks. )
Muqtader Abbas Shah
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
Our trusty Investopedia dictionary tells us that an index is "a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market."
It would be too difficult to track every single security trading in the country. To get around this, we take a smaller sample of the market that is representative of the whole. Thus, just as pollsters use political surveys to gauge the sentiment of the population, investors use indexes to track the performance of the stock market. Ideally, a change in the price of an index would represent an exactly proportional change in the stocks included in the index.
Today, the stock market uses a slightly complex methodology, called price-based weighting. In this system, the weight of each security is the stock's price relative to the sum of all the stock prices. The problem with price-based weighting is that a stock split changes the weight of a company in the index, even though there is no fundamental change in the business. For this reason, not too many indexes are weighted on price.
Most indexes weight companies based on market capitalization. If a company's market cap is $1,000,000 and the value of all stocks in the index is $100,000,000, then the company would be worth 1% of the index. These types of systems are made possible by computers--most are calculated by the minute and so are very accurate reflections of the market.
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If I could... Then I would... Turn back time!!
