A stock market index is a compilation of stocks grouped so that they act as an indicator of market trends within the index's area of focus. These indices, typically put together by the news media or financial services companies, show the current market trends and point you in the right direction so that you can make smart investments.

When looking for equity index providers to guide you in your financial investments, it's important to know exactly how each index is formulated and what each index is best at measuring. Consider the following information about index providers:

1. Most stock index providers measure either small cap indexes (companies with market capitalization between $300 million and $2 billion), mid cap indexes (market capitalization between $2 billion to $10 billion) or large cap indexes (market capitalization over $10 billion).

2. There are a few index fund providers that measure a total market index, including small, mid and large cap stocks.

3. Sector stock index providers measure the performance of a specific market only, such as biotechnology or transportation.

Action Steps
The best contacts and resources to help you get it done

Examine the major U.S. index providers

A U.S. stock index provider will measure the market trends for companies owned and operated out of the United States. There is a large range of U.S. index providers, with information on small, mid and large cap indexes and many that encompass all 3 for a total market index. If you have interest in keeping your investments in the national market, then use a U.S. market index to guide your investment strategy.

I recommend: The S&P 500 measures 500 large cap corporations. The Russell 3000 index measures the stocks 3000 of the largest publicly traded companies. The Wilshire 5000 is a total market index, with a general focus on the entire stock market and consisting of about 6,700 stocks. Visit Street Authority for a list of more U.S. index providers, including a detailed overview, composition information and the pros and cons for using each.

Consider stock index providers for sector indices

If you wish to invest in a particular market or industry, a sector index provider is the right choice for you. Sector indices focus on particular markets and provide a measurement of the stocks for companies within that market.

I recommend: Visit the NASDAQ website for a list of over 30 sector indices, including transportation, computers, technology, finance, insurance and many more. Street Authority also provides a short list of sector indices that may interest you, including the Gold BUGS index. The BUGS index measures only the stocks of gold mining companies with unhedged gold positions.

Go global with the use of an international stock market index

While investing in national markets may provide a sense of loyalty to one's country, the global stock market can show a hefty return on your investments. There is an international stock market index for nearly every major manufacturing and exportation county in the world.

I recommend: Research the German stock market with the DAX Index. The Hang Seng Index provides market trends for the Hong Kong stock exchange. Again, visit Street Authority for a comprehensive list of international market indices.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Consult with a financial adviser before investing in any stock, regardless of its record on a market index. There is risk involved in stock investments and no guaranteed return, so be sure you choose a stock that best suits your financial needs.