What is Market Average?
A market average is the general level of prices in a stock market as expressed by a basket of frequently traded stocks.
How Does Market Average Work?
A market average, best exemplified by the Dow Jones Industrial Average (DJIA) and the S&P 500 Index, is based on a basket of stocks, not all the stocks that trade on any given day.
Market averages can be price-weighted or market-weighted, depending on the methodology specified by the company that publishes the particular market average.
Why Does Market Average Matter?
The prices of stocks in a given market vary in terms of industry and frequency of trading, and it is not practical to account for every registered stock. A market average provides an overview of market activity that speaks to investor perceptions and economic productivity.