Financial Jargon Made Easy: Just What Is an Index?

"The Dow Jones was up 100 points today while the S&P dropped 75. Nasdaq remained steady." Have you ever heard a news report like this and wondered what it means?

Financial jargon can be intimidating and sound like a foreign language. If you don't know a term, it's easier to simply avoid thinking about it than asking what it means. And since more people are confused than not, you'd be hard-pressed to get an explanation anyway!

That's where we come in. This brief tutorial on the terms mentioned in the opening paragraph just might help you understand more about the world of investing.

The Dow Jones, Nasdaq and such are market indices that measure how groups of investments are performing, and in turn, provide a snapshot of the overall market. You can't invest directly in an index, and their performance doesn't reflect the performance of specific investments. They're basically an average of a bunch of numbers derived from price movements of stocks. Climbing numbers are generally better than falling ones.

• The Dow Jones Industrial Average was developed in 1896 by Charles Dow in an effort to make sense of market trends. It's the oldest and most-watched indexed in the world. Today, it tracks the performance of 30 major companies, such as Disney, General Electric and Microsoft.
• The S&P 500 (Standard & Poor's) originated in the 1950s and tracks stocks of 500 leading companies in leading industries in the United States.
• The Nasdaq Composite Index measures all U.S. and international stocks (about 4,000 of them) listed on the Nasdaq stock market. The majority are technology and Internet-related stocks.
• The Russell 2000® Index tracks, you guessed it, 2,000 stocks of smaller U.S. companies. It's a subset of the Russell 3000®, which goes to show just how confusing this can be.

There are many more where these came from, but you get the idea. Indices are one way to track investment performance, but one index does not the market make. Yet, their short-term movements up and down are easy news for the media and have been known to spark both panic and confidence among investors.

Take Action Tip for Today
The more you understand about investing, the more there is to know. But it boils down to setting goals, understanding how long you have to achieve those goals and knowing how much risk you can tolerate along the way. Investing is a long-term proposition. This risk tolerance quiz might get you thinking. How long you've got to let your money grow could affect how you invest it, but only if you're willing and able to assume the necessary risk.

More Resources

• We offer free, educational workshops in communities across the country, several of which provide more insights into investing. "Introduction to Investment Strategy" and "Economic and Investment Outlook" are two that may interest you. Find a workshop in your area.
• If you're looking for ways to save money here or be smarter there, read our tips. There's a new tip every day of the month that applies to your age bracket. Go to free daily tips.

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