Composite (Trading Markets) - Explained
What is. Composite Index?
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Table of ContentsWhat is a Composite?How Does a Composite Index Work?How an Index Is ManagedFactoring in Economic IndexesExamples of Benchmarks
What is a Composite?
A composite refers to a group of related items or parts of a whole. When similar items are put together, a composite is realized. In the context of securities, a composite refers to a grouping of securities, indexes or other related items. When equities are put together in a standard way in order to measure the performance of a sector or an entire market for a period of time, a composite is achieved. A composite is otherwise called a composite index, it is often used in investment analysis and in the prediction of market activities and economic patterns.
How Does a Composite Index Work?
A composite index serves as a statistic measure of the overall market. A large number of equities, indexes and other factors are combined to create a statistic value or representative of the sector. Large exchanges also use the composite index, for instance, the NASDAQ Composite index which can be used for measuring the entire stock market and track changes as they occur in the market. A composite index as used by an exchange also serves as a benchmark that evaluates the performance of an investment portfolio.
How an Index Is Managed
The Dow Jones 65 Composite Average is a popular index used to represent a particular sector. This index comprises stocks that serve as a statistical representation of the market. The Dow Jones 65 Composite Average index comprises 65 companies which are weighted by market capitalization to arrive at a standard statistics. The level of Capitalization of the companies in an index determines the value of the index, also, a company with a high capitalization has a larger percentage of the index.
Factoring in Economic Indexes
Composite Indexes are essential to economists and analysts, it is used to analyze economic trends and forecast economic activities. In this context, indexes or other factors combined must be done in a standardized way and be a perfect statistical representation of the economy, sector of the market being analyzed. The Index of Leading Economic Indicators comprises 10 economic indexes and is therefore referred to as an index of indexes. Certain economic factors also affect indexes.
Examples of Benchmarks
When an index is used as a benchmark in an investment market, it is used to measure the performance of an investment as well as the performance of the portfolio manager. Market indexes refer to excepted performance investment portfolios are to give over a particular period of time. Different portfolios and markets have different indexes, the Standard and Poor's 500 Index, for instance, is applied to portfolios with large capitalization (large-cap) stocks. Investment analysts often compare the performance of a particular portfolio to the market benchmark for adequate evaluation.