Online Stock Indexes: Resources for Business Researchers

By Vinyard, Marc | Searcher, June 2003 | Go to article overview

Online Stock Indexes: Resources for Business Researchers


Vinyard, Marc, Searcher


Headlines in newspapers and business segments on television news frequently proclaim that the "Dow dropped 87 points" or the "S&P is up 1 percent." Stock indexes such as the Standard and Poor s 500 and the Dow Jones Industrial Average serve as benchmarks for the entire stock market, with gains and losses closely monitored. As benchmarks, stock indexes cover a specific pool of specially selected stocks that reflect the strongest or most representative stocks in that market.

You may ask, "Why should I care about stock indexes?" Understanding stock indexes can be a powerful tool for investors seeking to gauge market trends, as well as the strength or weakness of a specific market sector like biotechnology stocks.

Business researchers and investors also use stock indexes to serve as benchmarks against individual investments, such as mutual funds and treasury bonds, or stocks in general. Indeed, stock indexes can help place events in the stock market into historical perspective. A researcher might compare the recent performance of the Dow Jones Industrial Average (DJIA) stock index with events, such as the performance of the DJIA during the 1991 Gulf War, for clues as to how the stock market might behave under similar wartime circumstances. Researchers can also use stock indexes from different countries to compare performance between nations. The popularity of stock indexes has even led to the creation of indexes for mutual funds that mirror the performance of stock indexes. One such mutual fund index, the Vanguard 500, mirrors the Standard & Poor's 500 stock index (S&P 500).

To track the performance of the entire stock market or a substantial sector, every stock index selects a group of stocks as representative of the entire stock market or the sector of interest. A change in the price of the index represents the average change in price for the stocks included in that index. Some stock indexes are price-weighted, with each company in the stock index given equal importance. Other stock indexes are based on market capitalization, with companies with a larger market capitalization given more importance. Market capitalization is the number of shares of stock outstanding multiplied by the current price of the shares.

Every stock index selects a different set of companies to represent the stock market. The oldest index, the DJIA, contains 30 large, blue chip companies in the U.S. Five hundred large, mostly U.S-based companies in a variety of industries comprise the S&P 500. Since a disproportionate number of technology companies belong to the Nasdaq Composite Index, it is often used as a benchmark for technology companies (1). Sector stock indexes such as the Nasdaq Biotech Index or the Dow Jones Transportation Index track the stock performance of specific industries. Some stock indexes such as the DAX (Frankfurt Stock Exchange) or the FTSE 100 (U.K.) cover the largest companies for a given country. Other indexes, such as the Dow Jones Global Indexes, cover stock market performance across various countries. Presenting the indexes in U.S. dollars makes country-to-country comparisons convenient.

It is important to distinguish between the price changes of stock indexes and figures for the total returns of an index. While determining price changes involves locating closing prices between two dates, total returns will also include income from dividends. Since total return figures include dividends as well as price changes, figures will be higher than those only accounting for price changes. There-fore, when assisting a client or patron, researchers must clarify if the clients simply want price changes or total returns, as the figures will differ significantly. Resources reporting changes in the prices of indexes are much easier to obtain than those containing total return figures.

To provide meaningful results, stock indexers usually have to track performance over several years. …

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