A share price index represents the value of a group of stocks that belong to the same investment category. Price indexes can be arranged based on the size of a business, the industry in which a company trades, as well as the exchange or region where shares are listed, for instance. Investors can often gauge the direction of an investment category with a glance at performance in a given share price index.
Investment performance in a price index is not only for observation. There are also mutual funds that are created to perform similarly to major market averages. Subsequently, investors can earn returns based on the performance in a share price index.
Stock indexes could represent trading in dozens or even hundreds of equity securities. This does not necessarily mean, however, that each stock is given the same influence in the fund. The effect that an individual security can have on a share price index depends on the way that the fund is weighted. An index could be weighted by the size of the companies that are members of the fund as based on market capitalization, which is a measure of the worth of public shares that are listed by a company.
Size is a common feature that is shared among companies in the same share price index. Some indexes are made up only of small stocks, for instance. Investors can gain a sense of how some of the riskiest securities in the stock market are trading by monitoring performance in a small-capitalization index because these companies typically have much growth yet to attain.
Different types of share price indexes trade in the financial markets. An index could represent a major exchange in a regional economy, for instance, such as the Nikkei average in Japan. Other stock price indexes might represent stocks that belong to the same sector, such as technology or energy. A share price index could drill down further to focus on a particular segment of an industry, such as oil services stocks under the energy investment category.
Positions on major stock market averages, which are a type of share price indexes, are often coveted. Companies also face the possibility of losing their status in a share price index if certain conditions are maintained. Some of the criteria could including keeping the market value of a stock above a certain threshold or maintaining a minimum market capitalization, for instance.