Stock Market Index

When you turn on the news, you hear about the stock market index, the stock markets around the world and the rise and fall of stocks. But what exactly is the stock market index, and what affect does it have on your life?

Simply put, a stock market index is the way the world measures the value of companies in various industries and the health of the economy.  

As these companies succeed and grow, they employ people and buy products and services. They also sell products and services to others, thereby supporting the global and local economy. When a company is healthy and growing, its stock goes up in value. People want to buy shares of the company to share in the success of the business.  

In exchange for their investment in the company, they get a stock share that pays dividends and/or can be sold for more money as the company continues to grow. The company uses the investment money to develop new products, open new offices and employ more people all for the purpose of continuing company growth. 

As part of the stock market whole, this company contributes to the overall health of the stock market index. If a lot of companies fail to grow, the overall market index goes down. If a certain type of company fails – let’s say in the technology industry - the entire market segment may be depressed, but the overall market index may remain high if other industries are not depressed.

Today’s global stock market is comprised of many indices or indexes. The Dow Jones Industrial Average reported and managed by the NASDAQ (American Stock Exchange), which is comprised of thousands of American companies, the Nikkei Average in the Japanese market, and the Hong Kong Hang Seng Index, among others. The French, the British and the German markets also have stock exchanges and stock indices reported daily as evidence of the health of the companies and the overall market in that country.  

It is difficult to compare and merge the information gathered from the various indices around the world. Some of these market indices are price weighted indexes like the U.S. Dow Jones Industrial Average and some are market value weighted indexes like the Hang Seng Index. Because the averages are reached by different weighting methods it is difficult to easily compare the results, though experts do so every day. These experts look at the stock weight in the index and the criteria that defines the measurement. With that information, they can make some educated conclusions about the health of the market. As the various market indices go up and down, the historical perspective of growth and recession in the market is measured to determine how the economy is growing or shrinking in relation to the historical market position.