Sub-indices are sectors of the market that can be studied on their own or included in a larger index. They are useful for sector analysis and can be used to track the performance of specific groups of stocks. Investors can use sub-indexes to make selections based on industry analysis or as a basis for buying index funds.
A sub-index is a sector of the market that can be included in a larger index but can also be studied on its own. Sector performance is usually measured by averaging the performance of all stocks included within it. Investors will often use sub-index information if they practice sector analysis, which looks at a specific set of similar stocks. Sub-indices are best used by comparing their current performance with that of other indices and with their past performance.
Investors can choose stocks individually, tracking the ups and downs of specific stocks and trying to discern future movements. Another way to attack the stock market is to look at the big picture, determining what moves to make from the movement of large portions of the market. Indices are one way to track that movement, as they group together similar stocks to get a broad view of that sector of the market. Using a sub-index puts a more precise point on a specific group of stocks.
In most cases, a subindex is just one of many subindexes that make up a large index. For example, a given stock market entity may produce an oil index that tracks the movement of all oil-related stocks. Within that large group, there may be sub-indexes to track oil refiners, oil producers, and so on. Depending on how narrow the investor wants the scope to be, some sub-indexes can really pinpoint the performance of one aspect of an industry.
This becomes invaluable for a stock trader who prefers to make his selections based on industry analysis. Sector analysis eschews the performance of individual stocks to get a look at how groupings of stocks are doing, and sub-indexes can be helpful in this research. For example, if a sub-index that tracks gold mining companies is trending up, an investor may buy heavily from all the stocks in that group.
Another way investors use sub-indexes is as a basis for buying index funds. Index funds are stocks that try to get a portion of all the stocks that make up a specific index. If this is done correctly by the fund manager, the performance of the index fund should mimic the movement of the particular index it tracks. By relying on a particularly profitable sub-index, an investor may be able to choose an index fund that proves to be particularly profitable.
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