An index is a standard method for tracking the performance of a number of assets. Stock indices typically measure the performance of a number of stocks in the market. There are several indices that are often used to display the overall situation of the stock market.
An example is the FBMKLCI Index which measures the performance of the top 30 stock counters on the main board of the Malaysian Stock Exchange. The S&P 500 index measures the performance of the top 500 company counters in the United States. The Dow Jones index measures the top 30 company counters on the US stock exchange.
There are also other more specific indices such as indices that record the movement of a particular industry or segment.
Indices are also used to measure other financial or economic data such as interest rates, inflation or manufacturing output. Indices often serve as a benchmark for assessing portfolio return performance.
An index is an indication or measure of something. In finance, an index usually refers to a statistical measure of changes in the securities market. In the case of financial markets, stock and bond market indices consist of a portfolio of securities that represent a particular market or segment.
Each index related to the stock and bond markets has its own calculation methodology. In most cases, the relative change of the index is more important than the actual numerical value that represents the index. For example, if the FTSE 100 Index is at 6,670.40, the figure tells investors that the index is almost seven times higher than its base level of 1,000.
However, to assess how the index has changed from the previous day, investors must look at the amount of the index that has fallen, often expressed as a percentage.
Indices are also often used as a reference to measure the performance of mutual index funds (index funds) and exchange traded funds (ETFs). For example, many mutual funds compare their returns to returns in the S&P 500 to give investors an idea of how much more fund managers earn than they generate in index funds.
Indexing is a form of passive fund management. Rather than fund portfolio managers actively selecting and determining market timing, that is, choosing securities to invest in as well as strategizing when buying and selling them, fund managers build portfolios in which the holdings reflect specific index securities.
The idea is to mimic the profile of an index, the stock market as a whole or a heavyweight segment and the fund will match its performance as well.
Since you cannot invest directly in an index, an index fund is created to allow you to invest in the performance of index movements. The fund combines mimic securities with what is in the index. For example, the Premier Index Fund which uses the FTSE Bursa Malaysia KLCI Index as a benchmark.
Among the popular index funds is the Vanguard S&P ETF (VOO) which is very similar to the S&P 500 Index.
When raising mutual funds and ETFs, fund sponsors seek to build portfolios that contain several different components within a particular index. This allows investors to buy securities that are likely to go up or down in line with the stock market as a whole or with market segments.
The S&P 500 index is one of the most well -known indices in the world and one of the most frequently used benchmarks for the stock market. The index accounts for 80% of the total number of stocks traded in the United States (US). The Dow Jones is also popular but only represents the share value of 30 publicly traded companies in the country.
Other leading indices include the Nasdaq 100 Index, the Wilshire 5000 Overall Market Index, the MSCI EAFE Index and the US Bloomberg Barclays Aggregate Bond Index.
Like mutual funds, indexed annuities are tied to a trading index. These securities offer rates of return that follow a particular index but usually have a limit on the returns they provide. For example, if an investor buys a Dow Jones indexed annuity and has a return limit of up to 10%, then his rate of return is between 0 and 10%, depending on the annual change of the index.
Indexed annuities allow investors to buy securities that grow in tandem with a heavyweight segment or the entire market.
