(May 27, 2011) Imagine if you believe in “growth” investing concept and looking out for suitable investing opportunities.  You decide on a sector, say, biotechnology sector.

However, as the stock belongs to a new company, you do not have sufficient historical data or numbers to back that stock. While your gut feeling says that this stock has huge upside potential in future, yet, there is some anxiousness on whether how the overall sector would perform in the mid or long term.

Take another scenario. You believe in portfolio diversification. So, you build your portfolio with stocks from different industries, sectors and size.

Now, assuming you are a retail investor with plenty of other commitments, how would you gauge whether your portfolio is likely to produce fruitful returns in the future.

In such cases, analyzing different indexes is the easiest and accurate way to understand overall stock market trend, sector trend industry trend through different indexes. Also, it is very difficult to keep a close –eye on every stock trading in the market.

Stock market indexes are the accurate indicators showing how overall stocks in general are performing or how a particular stock could behave in future. Careful analysis of indexes helps us in deciding what we should do with our money. Indexes like DOW, S&P 500, Russell 200, includes smaller samples of large cap, small cap mid cap companies. So, by tracking various indexes, we can get a good idea on whether our portfolio consists of “winners” stocks or not. Smaller samples are very good representation of the overall market.

This is very similar way to the media which uses pre-poll surveys to predict which political party will win the election. Just as poll surveyors use small sample of population in different demography, indexes cover very influential stocks from blue chip companies, small cap and mid cap companies associated with different sectors , representing the entire economy.

Besides, there are many sector specific indexes and ETFs that help in gauging the performance of a particular sector.