Purpose of market indices
market indices? If I look at news and social media, the purpose is clearly to generate a number representing how the markets are doing today or how they did yesterday. Added to this is the widespread ‘analysis’ that tries to find clues as to why the markets rose or fell. If this was all that the indices were good for, they would actually be good for nothing.
What can you, the investor, actually use an index for? It’s important to recognise that stock market indices do more than just provide a daily numerical snapshot of market performance. Every stock investor knows that market indices are like a report card for the overall market. They show how the market is doing, but not how each individual stock is doing. If you are only looking at the index, you might miss out on some good investment opportunities. For example, the index might be going up, but some stocks might be going down. You might not notice this if you’re only looking at the index. What else can we use the index for?
One great thing about indices, which most of us ignore, is that they serve as a bridge connecting the present with the past. They are historical archives, capturing the ebb and flow of the economy, business and market over time. In comparing the current positions of these indices to their historical levels, as well as the current patterns to the historical ones, we have a powerful tool for understanding not just where the market stands today, but how it got here and what might happen.
This historical perspective is crucial for several
