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🗞Index Reporting

Abby Hadidian
Abby Hadidian

Hey everyone! Today's newsletter is coming to you a little late today but to make up for it, I wanted to remind you that we made a Christmas Budget Tracker for you!

If you feel like your paycheck has suddenly disappeared in a flurry of Amazon orders and Christmas movie rentals use the Christmas Budget to help track that holiday spending!

Today, we are kicking off the first of a two part series about Index’s. In part one we are going into the 101 overview of index’s, including what they are, how they're made, how we use them.

Keep an eye out for part two later this week, where we’ll go into the history of indexes and the important ones you should know.

📰 In the Headlines

The business news stories we are watching & how you can follow along

💉 Vaccination Nation

Several COVID Vaccines have been approved by the FDA for emergency use

🚙 TESLA is joining the S&P 500

The electric vehicle wunderkind is officially joining the most widely followed stock index


In-depth Index

As you just read, TESLA is joining the S&P 500, one of the most often referenced stock indexes in the United States.

Indexes are an important and often unnecessarily complicated part of finance. To help us better understand what impact this will have, we need to understand what indexes are and what they are commonly used for.

What is an index?

An index takes a number of securities and tracks the average of their performance. There are indexes made of stocks, bonds, and other types of securities.

There are over 5,000 indexes in the US, and more than 2.96 million indices worldwide. The SEC does not regulate what is in an index and does not certify the legitimacy of any index.

The list of securities in an index is usually selected by choosing a few features and then finding a certain number of securities that fit the description. There are a lot of different methods and categories used for this but three common ones are:

  • 📍Location: In the same way we have the New York Stock Exchange on Wall Street, the UK has the London Stock Exchange and Japan has the Tokyo Stock Exchange. Different countries have their own markets for trading, along with indexes of the securities being traded. Most indexes limit themselves to securities from a certain country.
  • 💰 Market Cap: Some indexes consist of companies within a certain rage of market cap. Market Capitalization, also known as ‘market cap’ refers to the total value of all a company's shares of stock. One factor of whether companies over or under a certain market capitalization.  “Small Cap” indexes usually only contain companies with a market cap of less than $2 billion. If that sounds like a lot of money already, Large Cap, or Big Cap companies begin with a market cap of $10 billion.
  • 🏬  Sector: Some indexes are put together to represent a type of industry. These are often called ‘Sector Funds’.  There are funds that track the Tech Industry, Energy, Health Care, and much more.

What are indexes used for?

The need for indexes have evolved a lot throughout the history of modern finance, and in today’s world, they are mostly used for three purposes:

  • 🧭 Measurement: When reporting on the performance of a security, investment managers and analysts use indexes as the benchmark for comparison. If a stock index is the average of all the securities in an industry, or the entire market, analysts use it to tell if a particular stock is performing better or worse than the average. That’s where phrases like “outperforming the market” come from.
  • 🎥 Media: Reporters love indexes. Indexes are often used as an un-nuanced snapshot of how the market is doing as a whole, and how news stories are affecting it. When journalists speculate on how a news story might affect investments & spending, they often look to ‘the market’, meaning the S&P 500, the Dow Jones, or, when referring to tech, the Nasdaq.
  • 💼 Management: Financial institutions use the portfolio of securities in an index to create Index Funds or Exchange Traded Funds. An Index is not an investment in itself, but is used to create index funds or exchange traded funds (ETF’s).  If you want to learn more about these, I recommend you listen to John’s great series about ETFs on the podcast.

Final Thought

Have any questions about indexes or investing in ETFs? Send us your questions to crew@fourminute.fm and we’ll include them in Part Two of our series.

Word of the Day

Public Float

(n.) The shares of a company that are available to be bought and sold by the general investing public.

Abby Hadidian

Newsletter writer for Four Minute Finance | Econ Nerd & Pun Enthusiast