What are indexes?

Any investor dealing with stocks or derivatives will have to know what indexes are. Every tradable stock on the open market can be found in one or more indexes. An index comprises a fixed number of important stocks. Almost in every developed country the rise and fall of index values are used to indicate if the economy does well or not.

An index can be compared to a basket of fruit. The basket is filled with different fruits like apples, pears, pineapples and bananas. This basket has a total value which will go up if most stocks go up and will go down when most stocks go down. Like with fruit, not every stock in the index has the same weight. Big corporations tend to weigh heavy on the total value of the index. If these corporations go up or down, it has great effect on the price of the index, no matter what the rest of the stocks do.

One of the most important indexes in the world is the Dow Jones index. This index from the United States of America is also one of the oldest and was established in 1896 by Charles Dow and Edward Jones. In the Dow Jones index every stock has the same weight. This means that big corporations do not weigh heavier on the index value as the smaller corporations in this index. The Dow Jones houses 30 of the most important stocks in the USA, but still gives a very limited view of something as large as the American economy. That’s why most professional investors look at the S&P 500 index which gives a more complete picture. This index is home to 500 American stocks. The equivalent for Europe is the Stoxx Europe 600 index, which tracks 600 publicly traded companies from eighteen European countries.

It is not possible to invest in indexes directly. It is possible to do so with trackers/ETF’s which follow indexes by having all related stocks under one tracker. This allows investors to easily diversify their portfolio with multiple stocks, without having to buy these stocks directly. Defensive investors or investors with small budgets should always have at least some index trackers in their portfolio. Other derivatives like options and turbos also allow indirect speculation on the value of an index.

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