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A common and effective way to gain perspective on stock price fluctuations is to compare the
movement of your stocks to that of indices or market indicators. About 100 years ago, as the
number of individual stocks grew, the need to measure how the stock market performed became
obvious. In 1896 The Dow Jones Company took groups of stocks and averaged their prices to
create the first indices, the Dow Jones Averages. They created four different indices: one for
industrial companies, one for utilities, one for transportation companies and a composite that
included the three other indices.
In the 1920s, Standard & Poor's Corporation (S&P) created separate indices. These indices also
measured the market as a whole in addition to some sectors of the market. In 1957, when
technology enabled the companies to start calculating their indices on an hourly basis, S&P
created the S&P 500 Index, which measured the performance of a larger proportion of the market
compared to the more popular Dow Jones Industrial Index.
Over the years, the S&P and Dow Jones indices have remained popular, leading both companies
to create other indices. In addition, other companies and even the exchanges themselves have
created more indices.
Different indices are calculated in different ways. Few remain as simple averages. An index
moves when the stocks in it move. When a stock in an index goes up or down, so does the index.
Hence, when you hear that the Dow Jones closed at 10,500, down 20 points for the day, it means
that the average of the prices of the 30 stocks that comprise the Dow is 10,500 and the combined
value of these 30 stocks (as calculated by the index) dropped 20 points during that day's trading.
Calculation method aside, all indices measure the performance of the stock market or some
subsection of it on a continuing basis throughout each trading day. By tracking an index, or a
variety of indices, investors can quickly gauge market trends that may impact investment
decisions.
What is the point of following the indices when what you care about is your own stock portfolio
performance?
Indices often reflect trends in the market and in the economy. Watching overall market
performance can be the key to making smart decisions about your individual investments. For
example:

• Indices can function as benchmarks to compare the performance of the stocks you own against the market in general.
• Comparing today's market movement with similar market movements from the past may help you become aware of trends, and the best times to buy or sell.