Index An index is a grouping of stocks used by th

Index

An index is a grouping of stocks used by the financial markets as a benchmark of performance. Examples of indices follow. The Dow Jones Industrial Average(DJIA): A price-weighted index of thirty giants of American Industry. Price-weighted means that higher-priced stocks receive more weighting than lower-priced ones. Examples of stocks in the DJIA are IBM, General Motors, and Microsoft. The New York Stock Exchange Composite Index: A price-weighted index made up of all NYSE stocks. Standard & Poors 500 Index: A market capitalization weighted index (shares outstanding multiplied by stock price per share). The Nasdaq Composite Index: A statistical measure that indicates changes in the Nasdaq Stock Market by measuring all Nasdaq common stocks. It is price-weighted.

Trading Considerations

While one cannot directly trade indices, there is value in reviewing technical events for indices. For example, if there is a bearish event for a technology-based index, an investor might want to rebalance his/her portfolio to protect against bearish price movements in technology-based stocks. Or if a strong bullish pattern appears in a pharmaceutical company, but a pharma-based index shows a bearish event, then an investor may think again about taking a position in the pharmaceutical company since the industry is moving in the opposite direction.