Understanding Equity Indices
- A stock market index covers the entire market or a section of the stock market
- The Wilshire 5000 index covers the entire US stock market
- Sector indexes cover specific sectors of the economy
- Indexes are used to measure performance of the market or compare portfolio performance against a benchmark.
An equity index or a stock market index, is an indicator for the performance of the stock market, or a specific subset. For example, the largest equities in the US stock market are covered and measured by the performance of the S&P 500.
On the larger end, the Wilshire 5000 index covers the “entire stock market” because it includes all publicly traded companies headquartered in the US. This index can be used to measure the performance of the US stock market.
On the more specific side, you can find an index which covers a specific sector of assets. For example, the S&P Technology Select Sector is an index which covers all the technology companies covered in the S&P 500 index. Furthermore, additional indexes cover specific sectors of the economy.
These indexes are used as measures to track the performance of the overall economy or a specific sector. However, indexes can also be used by investors to test the performance of their portfolio against a benchmark. E.g. If RJ's portfolio is lagging behind the performance of the S&P 500 index, this is an indicator for him to rebalance and reposition himself.