Uses of Market Index

Market index refers to a portfolio of securities that represent a particular section of the stock market. The securities that are part of a particular index often come with certain characteristics.

A market index measures the value of a portfolio of holdings with specific market characteristics. Each index has its own methodology which is calculated and maintained by the index provider. Index methodologies will typically be weighted by either price or market cap. A wide variety of investors use market indexes for following the financial markets and managing their investment portfolios. Indexes are deeply entrenched in the investment management business with funds using them as benchmarks for performance comparisons and managers using them as the basis for creating investable index funds.

Uses of Market Indexes

People from many walks of life use and are affected by market indexes. Economists and statisticians use stock-market indexes to study long-term growth patterns in the economy, to analyze and forecast business-cycle patterns, and to relate stock indexes to other time- series measures of economic activity.

Investors, both individual and institutional, use the market index as a benchmark against which to evaluate the performance of their own or institutional portfolios. The answer to the question, “Did you beat the market?” has important ramifications for all types of investors.

Market technicians in many cases base their decisions to buy and sell on the patterns that appear in the time series of the market indexes. The final use of the market index is in portfolio analysis.

In discussions of the market model and systematic it will be evident that the relevant riskiness of a security is determined by the relationship between that security’s return and the return on the market.

Among economists and statisticians one of the major uses of stock-market indexes is to use them as a leading economic indicator. Judging by how long they have been employed, leading indicators of economic activity must be considered in a forecasting success.

Unlike econometric modeling, the leading economic indicator approach to forecasting does not require assumptions about what causes economic behaviour. Instead, it relies on statistically detecting patterns among economic variables that can be used to forecast turning points in economic activity.

Real World Examples

Some of the market’s leading indexes include:

• S&P 500
• Dow Jones Industrial Average
• Nasdaq Composite
• S&P 100
• Russell 1000
• S&P MidCap 400
• Russell Midcap
• Russell 2000
• S&P 600
• S. Aggregate Bond Market
• Global Aggregate Bond Market