There are several benchmarks an investor could use to measure various markets. These benchmarks, or indexes, are functions of the prices of several securities. The selection of those stocks or bonds, how many are included, and the weighting given to each position is determined by the producer of the index. Some of the most popular indexes include:
- DJIA – Commonly known as "the Dow", the Dow Jones Industrial Average is comprised of 30 large companies which are often considered the biggest corporations in America. Originally all 30 companies were industrial, but today several it includes a cross section of domestic business including American Express, AT&T, Disney, Verizon, Hewlett-Packard, Walmart, and Intel. Dow Jones produces many indexes although the DJIA is the most popular.
- S&P 500 – Produced by Standard & Poor's, the S&P 500 is similar to the DJIA but includes a much wider selection of component stocks (500 of them in fact). Because it includes more than fifteen times as many companies, the S&P 500 is regarded as a much better indicator as the markets as a whole. Like Dow Jones, Standard & Poor's produces many different market indexes.
- NASDAQ – An acronym for National Association of Securities Dealers Automated Quotations, the NASDAQ is an electronic securities exchange which has more than 3800 active issues. While the NASDAQ index covers a large number of companies, many of the larger and older firms trade on other exchanges so the NASDAQ is heavily influenced by newer companies which are often technology related.
It does not matter if you want to measure large domestic stocks, small international stocks, government bonds, real estate values, or any other identifiable market segment, chances are someone somewhere has an index which quantifies it.
Passive investing is a deliberate decision to mimic an index. There are several good reasons behind passive investing. Proponents of this investment philosophy believe it is difficult to consistently outperform the index through trading. They believe in purchasing funds which hold the same securities, appropriately weighted, as the index it aims to duplicate. Since there is little trading or decision making required to manage this type of fund, the management fees and expenses are typically quite low.
The opposite of passive investing is active management. Active managers believe that through tactical application of market information and prudent decision making, they can produce a return greater than a given index. Since expertise and trading is required the fees and expenses of an actively managed investment are typically higher than a passive investment which means that to be practical, the active manager must outperform the index PLUS the additional costs.
Regardless of their position, both sides of this issue are passionate about their stance and the debate has endured for many years.