What is a Market Average?

A market average is a measurement of a group of stocks that represent a specific sector or type of industry. Market averages are used to get an indication of how the stock market as a whole is performing. There are several different market averages, each of which changes on a daily basis each day the stock market is open.

The stock exchange refers to the arena in which shares of public companies are bought and sold. Each stock is listed on the market under a given symbol and its price fluctuates up and down on the basis of the perceived value of a share of the particular company. Individual investors, hedge fund managers, mutual fund managers, brokerage houses, pensions plans, companies and numerous other entities can all buy shares of stock.

Market averages are used to indicate how the market as a whole is performing. A market average is determined by selecting a group of related stocks or companies that all have something in common and determining the average selling price for those particular stocks. Within the United States, several market averages exist, including the Dow Jones industrial average, the NASDAQ, and the S&P 500.

The Dow Jones industrial average is a famous market average measure and is reported on by the financial press to give people an indication of the market as a whole. The Dow is determined by the stock prices of 30 large companies. These large companies are often called "blue chip companies," which is a generic term used to refer to a large and established company.

The stocks used to determine the Dow Jones industrial average change periodically. The stocks used to determine those sold on the NASDAQ are those sold electronically and are primarily technology stocks. The stocks used to determine the S&P 500 market average are the stocks of the top 500 companies as listed by Standard & Poor's rating service.

A market average is determined by adding up the total prices of the stocks in the group and dividing by the total number of shares. Because the total number of shares of each stock available is taken into account, this is considered a price-weighted average. Changes in the price-weighted average are computed on a daily basis when the market is open, as stock prices rise and fall.