Wilshire 5000 Index
What it is:
The Wilshire 5000 Index is considered the "total market index." Designed to track the value of the entire stock market, the index was started in 1974 by Wilshire Associates soon after computers made the daily computation of such a large index possible.
How it works (Example):
The Wilshire 5000 is comprised of virtually every stock that meets three criteria:
1) The firm's headquarters are based in the U.S.
2) The stock is actively traded on a U.S. exchange.
3) The stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks).
Though the index started with --as the name implies-- 5,000 firms, it actually contains around 6,700 today. The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.
Why it Matters:
Because it is so diverse, it is impossible to tell which sectors or asset classes are moving the market (technology, industrial, small-cap, large-cap, etc) by merely looking at the Wilshire 5000. In addition, many people do not own a large number of the small-cap stocks that this index holds, so it may not accurately represent the portfolio mix held by most investors.