Stock Market Index | Definition and Explanation for Beginners

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In this video today we are going to talk about stock market indexes. You’ll learn what is stock market index, major stock indexes and lesser-known ones, different types of indexes and how to read them.

0:00 What is A Stock Market Index?
1:10 Major Stock Market Indexes
1:48 Lesser-known Stock Market Indexes
3:53 Indexes Weighting Explained
5:25 Indexes by Types of Stock
6:28 Indexes by Market Capitalization
7:07 How to read a Stock Market Index?
8:32 What are the uses of Stock Market Index?

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A stock market index shows how investors feel an economy is faring. An index collects data from a variety of companies across industries. Together, that data forms a picture that helps investors compare current price levels with past prices to calculate market performance.

Here are major stock indexes:
• Dow Jones - Tracks 30 of the largest and most important U.S. companies -- and the price-weighted list doesn't change frequently.
• S&P 500 - A barometer of the overall stock market's performance that contains 500 companies, weighted by market cap, from across different sectors.
• Nasdaq - This index includes the roughly 3,000 companies that are part of the Nasdaq stock exchange and is predominately focused on technology.

Lesser known stock indexes
• Nasdaq 100
• Russell 2000
• Russell 3000

Indexes by Types of Stock
• S&P 500 Value Index – The S&P 500 Value Index consists of the stocks in the S&P 500 that are considered to have "value characteristics." These are generally stocks that trade for relatively low multiples of their book values and earnings, and tend to be more mature, slower-growing companies. Some of the largest stocks in this index include JPMorgan Chase (NYSE:JPM), Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), AT&T (NYSE:T), and ExxonMobil (NYSE:XOM).
• S&P 500 Growth Index – The stocks in the S&P 500 considered to have "growth characteristics" make up the S&P 500 Growth Index. While there are no specific cutoffs to distinguish growth stocks, they are generally (but not always) companies with above-average sales growth and trade for relatively high price-to-earnings ratios. Some of the largest stocks in the S&P 500 Growth Index are Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Facebook(NASDAQ:FB), and Visa (NYSE:V).

Indexes by Market Capitalization
Technically, the S&P 500 is a part of a total-market index known as the S&P 1500. The S&P 500 is the large-cap portion, but other segments are:
• S&P MidCap 400
• S&P SmallCap 600

Weighted indexes
Each stock in an index has a weighting assigned to it. Stocks with higher weightings have more influence on the index's movements than those with lower weightings. There are three different ways that indexes typically assign weightings to their stocks:
• Price-weighted indexes give more weight to companies with higher stock prices. For example, in a hypothetical index made up of three stocks with share prices of $70, $20, and $10, the $70 stock would make up 70% of the total index, regardless of the relative size of the company. The Dow Jones Industrials is the most important example of a price-weighted index.
• Market-capitalization-weighted indexes give more weight to companies with higher market capitalizations. Both the S&P 500 and the Nasdaq Composite are market-cap weighted, and large companies like Apple ankd Microsoft (NASDAQ:MSFT) have much greater weightings than the smaller companies that make up the indexes.
• Equal-weight indexes give the same weighting to each stock, regardless of price, market capitalization, or any other factor.
There are some other stock market indexes that use proprietary methods to come up with weightings. For example, some indexes assign weightings based on the dividends that a stock pays out.