BUSINESS & CAREERS
From Issue #5
What
is a Stock Index?
Explaining Financial Benchmarks
Ever
hear someone say that they made 12% on their investments last
year and wonder if that was good?
Every business day the news reports the movement of the TSE,
Dow Jones Industrial Average and the S&P 500 Stock Price
Index. Feel like you need a translator? I hope what follows
will help make some sense of these numbers and help you follow
the business news.
An index, also called a benchmark, is a method of tracking the
performance of a specific market. In the simplest terms, the
values of items in a given market are added up and a starting
point is established. From that point the values are tracked
periodically. If the total rises, then the change is placed
over the starting point total and a percentage increase is obtained.
Keep going it gets easier.
A good example is the Consumer Price Index (CPI). The
actual calculation of this index is somewhat complex but the
idea behind it is simple. Over time, the same group of goods
are purchased and the total cost of the goods are calculated.
An increase represents inflation while a decrease indicates
deflation.
For example, every year on the first day of school you could
purchase the same goods and services and total all of the costs.
If the cost were totaled the first year at $100 and the next
year at $110 then you would be facing 10% inflation. These calculations
would then be presented formally to your parents and an increase
in allowance could be pursued.
The TSE 300 Composite Index is based on the market values
of 300 stocks that trade on the Toronto Stock Exchange (TSE).
The same 300 stocks are valued constantly through every trading
day and the index is reported as an ever-changing measure of
the markets through the day. An upward trend indicates an overall
increase in the stock prices being tracked while a decrease
indicates a downward trend in overall stock prices.
Just as Canadian Stocks are compared to the performance of the
TSE 300, US stocks can be compared to the Standard and Poor's
(S&P) 500 Stock Price Index or the Dow Jones Industrial
Average (DJIA).
The S&P 500 Index is based on the market values of
500 leading stocks. The bulk of which trade on the New York
Stock Exchange (NYSE). The rest trade on the American Exchange
(AMEX) or the over-the-counter market (OTC).
The Dow Jones Industrial Average (DJIA) is probably the
most recognized exchange in the world. This index is based on
the market prices of 30 large companies that trade on the NYSE.
