"An index is a great leveler."
Today there are several averages or indices but the two most important and most quoted are the Dow Jones Industrial Average (DJIA) and the Standard and Poor’s 500 Index (S&P500). The reason these averages became so important is because suddenly investors could immediately understand the direction of the markets and invest accordingly. Soon the idea of mutual funds created an investment vehicle specifically to invest in the companies included in these indices so that investors could reduce their overall risk by investing in a “basket” of equities.
For example, a mutual fund like the Vanguard 500 invests specifically in the companies included in the S&P500 Index. It's also required to invest in the companies in the exact same proportion as the S&P500 itself. The purpose of this is so the mutual fund mimics the exact activity of the S&P500 Index.
"Index investing outperforms active management year after year."
Today it was announced that Facebook, a social networking company, would be added to the S&P500 Index at the end of next week (20 Dec) while Teradyne, a testing equipment firm, would be removed from the Index. During this transition period it should be interesting to watch Facebook (FB) for upward pressure and Teradyne (TER) for downward pressure as the mutual funds readjust their compositions.
The S&P500 announcement was made after the close today and in after hours trading Facebook is already up $1.98 (4.01%) to $51.36. These two stocks may be worth watching if only for information and entertainment.