What It Is:
How It Works/Example:
A market average, best exemplified by the Dow Jones Industrial Average (DJIA) and the S&P 500 Index, is based on a basket of stocks, not all the stocks that trade on any given day.
Market averages can be price-weighted or market-weighted, depending on the methodology specified by the company that publishes the particular market average.
Why It Matters:
The prices of stocks in a given market vary in terms of industry and frequency of trading, and it is not practical to account for every registered stock. A market average provides an overview of market activity that speaks to investor perceptions and economic productivity.