People from many walks of life use and are affected by market indexes. Economists and statisticians use stock-market indexes to study long-term growth patterns in the economy, to analyze and forecast business-cycle patterns, and to relate stock indexes to other time- series measures of economic activity.
Investors, both individual and institutional, use the market index as a benchmark against which to evaluate the performance of their own or institutional portfolios. The answer to the question, “Did you beat the market?” has important ramifications for all types of investors.
Market technicians in many cases base their decisions to buy and sell on the patterns that appear in the time series of the market indexes. The final use of the market index is in portfolio analysis.
In discussions of the market model and systematic it will be evident that the relevant riskiness of a security is determined by the relationship between that security’s return and the return on the market.
Among economists and statisticians one of the major uses of stock-market indexes is to use them as a leading economic indicator. Judging by how long they have been employed, leading indicators of economic activity must be considered in a forecasting success.
Unlike econometric modeling, the leading economic indicator approach to forecasting does not require assumptions about what causes economic behaviour. Instead, it relies on statistically detecting patterns among economic variables that can be used to forecast turning points in economic activity.