A subindex is a sector of the market that can be included in a larger index but can also be studied on its own. The performance of the sector is usually measured by averaging the performance of all of the stocks included within it. Investors will often use subindex information if they are practicing sector analysis, which analyzes one specific set of stocks that are similar to each other. Subindexes are best used by comparing their current performance to other indexes and to their own past performance.
Investors may choose stocks individually, tracking the highs and lows of specific stocks and trying to discern future movement. Another way to attack the stock market is to look at the big picture, determining which moves to make by the movement of large portions of the market. Indexes are one way to track such movement, as they group similar stocks together to get a broad view of that sector of the market. Using a subindex puts a finer point on a specific group of stocks.
In most cases, a subindex is just one of many subindexes that make up one large index. For example, a certain stock market entity may produce an oil index that tracks the movement of all oil-related stocks. Within that large group, there may be subindexes to track oil refineries, oil producers, and so on. Depending on how narrow the investor wants the scope to be, certain subindexes can really pinpoint the performance of one aspect of an industry.
This becomes valuable to a stock trader who prefers to makes her selections based on sector analysis. Sector analysis eschews the performance of individual stocks to take a look at how groupings of stocks are doing, and subindexes can be useful in this pursuit. For example, if a subindex tracking gold-mining companies is trending upward, then an investor may buy heavily from all of the stocks contained in that group.
Another way that subindexes are used by investors is as the basis for buying index funds. Index funds are securities that attempt to get a piece of all of the stocks that make up a specific index. If this is done correctly by the fund manager, then the performance of the index fund should mimic the movement of the particular index it follows. By honing in on a particularly lucrative subindex, an investor may be able to choose an index fund that turns out to be particularly profitable.
