We have become accustomed to index numbers in our daily lives. They are used for all phases of human activity, one of the best known being the Cost of Living Index. It is only natural that we should employ some sort of index to show the behavior of stock prices.
There are a number of such indexes, although some of the most well known are really averages and not true indexes, since an index must have a base of reference; but the averages are so well known and so commonly talked about that some explanation of them is in order.
The Dow-Jones averages were first published as far back as 1884 and were originally the simple arithmetic averages of 11 active stocks, later increased to 12. In time other stocks were added, some dropped and others substituted. By 1896 one average was made for the railroad stocks and another for industrial issues. The long history of such changes is of little importance to us here, nor is the recital of the changes made in the method of computation.
As now published, the Dow-Jones consists of four averages: 30 industrials, 20 rails, 15 utilities, and the combination of these into a 65-stock average, all being stocks listed upon the New York Stock Exchange. They are published regularly and are well known in financial circles throughout the nation. A certain theory of stock market forecasting, known as the Dow Theory, is based upon their behavior.
Other well-known averages are those of the New York Herald Tribune and The New York Times; the Standard & Poor is really an index. For the purposes of the investor of modest means, the important thing is that nobody buys or sells the stock "averages"; people buy individual stocks.
The averages (and you may take your choice) are of value in that they may indicate a trend, but unfortunately they are sometimes too insensitive to do so positively. On a week to week or even a month to month basis, the three most popular averages (Dow-Jones, Standard & Poor, New York Times) may quite well agree as to the market trend; on a day-to-day basis, they may fail to confirm one another, so that the investor may well be puzzled. For our purposes, we may say that the gyrations of a certain average are only of interest over a considerable period of time and they are to be accepted with caution. In this connection we may note that experts have indicated that the Standard & Poor has an increasing group of adherents, since it utilizes 500 stock issues, which normally account for close to 80 percent of the common stock trading on the New York Stock Exchange; and, what is very important, S & P computes averages for particular industries as well.
What is the best index? That is difficult to answer in the form of a flat statement, as something depends upon how it may be used. At any rate, there is much in print dealing with this interesting and even fascinating aspect of the stock market; the investor of modest means need not become unduly disturbed, for if he buys for investment, the minor fluctuations of the stock market need not be of great concern to him.
The best way to determine which indexes are most important for you to follow is to speak with your broker. No doubt he will have a grasp of which pieces of information you should follow religiously, and which you should let fall by the wayside.