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Stock market talk is everywhere, from TV and radio, to the newspapers and the web. But what does it mean when people say that "the market turned in a great performance today?" What is "the market" anyway?
As it turns out, when most people talk about "the market," they are actually referring to an index. With the growing importance of the stock market in our society, the names of indices such as the Dow Jones Industrial Average (DJIA), S&P 500 and Nasdaq composite have become part of our everyday vocabulary.
An index is a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market. It would be too difficult to track every single security trading in the country. To get around this, we take a smaller sample of the market that is representative of the whole. Thus, just as pollsters use political surveys to gauge the sentiment of the population, investors use indexes to track the performance of the stock market. Ideally, a change in the price of an index represents an exactly proportional change in the stocks included in the index.