Stock Market Index History

Stock market indices play an important role in gauging the economic health and progress of a country.  Oftentimes someone will say “the stock market is up” or “down” but that is not necessarily a meaningful statement.  Understanding how stock market indices are calculated and their history can be very instrumental in understanding the stock market as a whole.

The Origin Of The Stock Market Index

As stock markets became more and more prevalent in industrialized countries, people began to look for a “barometer” of the stock market as a whole.  The very first stock market index was the Dow Jones Transportation Average, which was created by Charles Dow in 1884.  It was followed shortly thereafter by many more indexes like the Dow Jones Industrial Average which, in a very modified form, is still widely publicized and followed today.

How Indices Are Calculated

A stock market index is generally calculated by combining a weighted average of a set of particular stocks.  For example, in the case of the Dow Jones Industrial Average, 30 stocks are weighted by price to get a measurement of the market as a whole.  It should be noted that all indices are somewhat arbitrary and are more useful as indicators of relative and historical growth rather than a raw number.  Additionally, in many indices stocks often times are added or removed due to bankruptcies or simply becoming less relevant than another stock.  Most recently Kraft Foods replace AIG in the Dow Jones Industrial Average.

Popular Stock Indices

The most popularly referenced American stock market indices are:

The Dow Jones Industrial Average – These are 30 of the largest American stocks.

The S&P 500 – The 500 large actively traded US stocks.

The NASDAQ Composite – An index of all the common stocks on the NASDAQ exchange.

Foreign Stock Indexes:

Other countries of course have their own stock markets and thus their own averages to use to measure them.  Britain has the FTSE (pronounced like “Footsie”) which is very similar to Americas S&P.  Japan has their Nikkei average.  Hong Kong has the Hang Seng.  There are of course many more.