When investors talk about how a stock market is performing, they usually think of a benchmark index, such as the Hang Seng Index for Hong Kong, or the Dow Jones Industrial Average for New York. However, a recent debate over the Dow Jones highlights the difficulties with this assumption.
The problem is that three of America's largest and most influential companies - Apple, Berkshire Hathaway, and Google - are not included in the 30-member index. Thus, Standard & Poor's, which now controls the Dow Jones, is wondering whether these need to be part of the benchmark index to make it more representative.
It's a problem because if they were included, they would dominate the index, which might misrepresent how the market as a whole is performing. However, a benchmark index that lacks some of the biggest players can also be accused of being misleading. There is no easy answer.
Indices such as the Dow Jones are proxies for the market as whole and should be reliable indicators as to how the market is performing. In this light, the difference between this year's performance of the Dow Jones compared with the wider Standard & Poor's 500 Index is instructive. The former is up by over 11 per cent since the beginning of this year, and the latter has risen about 16 per cent.
The situation in London is more intriguing. The benchmark FTSE 100 is up some 4 per cent on the year, but the FTSE 250 - which covers the most highly capitalised companies outside the FTSE 100 - is up over 16 per cent. The FTSE 350, which combines the 100 and 250 indices, rebalances them with a rise just below 6 per cent this year.
This mirrors the FTSE All Share Index, which covers all shares on the market's main board. This index is up about 6 per cent on the year.
