What is a composite index?
A composite index is a wide-ranging index made up of various equities, indices or other items. It's mainly used as an indicator of overall performance of a market or specific sector over time.
Key takeaways
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A composite index is a wide-ranging index composed of various equities, indices, or items used to track overall market or sector performance.
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The Nasdaq composite index, comprised of approximately 3,000 stocks, is a well-known example where the largest firms have the biggest impact.
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Composite indexes are better overall market indicators than narrow indices because their breadth includes many more components for comprehensive measurement.
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Investors should use composite indexes as portfolio performance benchmarks and aim to outperform these main indexes with their investments.
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Beyond investing, composite indexes can measure various metrics including inflation rates and people's lifespan across different applications.
Where have you heard about composite indexes?
You’ve heard of the Nasdaq. Its composite index is regularly quoted by the media and comprised of about 3,000 stocks listed on the Nasdaq national market. The largest firms have the biggest impact on its value.
What you need to know about composite indexes
If you want to check price level changes to an entire stock market or business sector, composite indexes are handy tools. The breadth of composites makes them much better indicators of overall market performance than narrow indices that don't have nearly as many components.
Because of that, they offer a useful benchmark to measure your portfolio against. You should be aiming for your portfolio to outperform the main composite indexes.
Composite indexes aren’t just used in investing circles though. They can be used to measure everything from inflation to people's lifespan.