Financial Benchmark Basics

The financial benchmark is commonly used in the investment world in order to gauge the performance of certain investments. If you are going to be an investor, you need to have a solid grasp of what financial benchmarks are and how they work. When you are investing in a particular investment, such as a stock or a mutual fund, it can be difficult to tell if the investment is doing well. The investment might provide you with a small return, but you need to know if you could be doing better with other types of investments. In order to gauge your success, it is nice to be able to compare your investment to something else. A financial benchmark gives you a point of reference to compare your investments. Benchmarks are very commonly used when determining the performance of a mutual fund.

What Are Financial Benchmarks?

Financial benchmarks are also referred to as financial indexes. A financial index is a compilation of many different investments. For example, you could have a stock market index that is comprised of every stock within the stock market. When you review the performance of this financial index, you are going to be able to determine how the stock market is performing as a whole. There are a number of financial institutions that publish information about their financial indexes. These companies will spend a lot of time compiling all of the different securities that make up their index.

In order to determine how a financial index is doing, they can add up the total value of the underlying securities and compare that to the previous value of these securities. This will allow you to see how much return that financial index has generated over a certain amount of time.

Using Financial Indexes

If you are an investor in a mutual fund, you can use a financial index in order to determine if you should stick with your fund or sell your shares. You need to find a financial index that is closely related to the mutual fund that you are investing in. Make sure that you are comparing apples to apples. Many investors choose a financial index that is not based on the same investment strategy that their mutual fund is. Many times, your mutual fund will tell you what financial index they are using as a benchmark.

Common Financial Indexes

There are many different indexes out there that you could use for comparison. For example, one of the most commonly used financial indexes is the S&P 500. The S&P 500 is a financial index that is made up of 500 of the biggest companies in the United States. This is a good comparison for mutual funds that invest in large cap stocks.

Another common financial index is the Dow Jones Industrial Average. There are also financial indexes that you could use to determine the performance of bond funds, international stock funds and many other types of mutual funds.

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