The Kentucky Society of CPAs offers the following information on stock indexes to help you become a wiser investor. Stock indexes are groups of stocks that are selected, assembled together, and given a weighing relative to the rest of the stocks in the group. The higher the stock s market value, the more its performance counts. Indexes can provide a quick snapshot of how particular types of stocks fare and perform in comparison to other types of stocks. Knowing your way around the more common indexes is especially important in today s market where returns can vary widely from one sector of the market to another.
Indexes also provide an important historical perspective of the market.
Many mutual funds measure their results against the performance of a particular index. You should use indexes to compare or benchmark the performance of your stock market investments and to determine how your investments are doing. For an accurate assessment, it is important to know which index is most representative of your stock holdings. If, on the other hand, your investment interests lean more toward the stock of smaller companies, the Russell 2000 might be a better barometer. Here s a description of some of the major U.S. stock market indexes.