What is a benchmark?

A benchmark is a standard that is used to measure the performance of a security, mutual fund, or investment manager. Typically, broad market indexes such as S&P 500, Dow Jones, and Nasdaq are used for this purpose.

How to use benchmarks in investing

Benchmarks are usually used as follows. First of all, an investor creates an investment portfolio by adding different stocks. Then, this person compares the portfolio’s performance over a certain period with a benchmark, for example, S&P 500.

  • If the portfolio shows greater results than the benchmark (traders say ‘outperform’), it signals that the investor’s decisions were right, the investing strategy was well-chosen, and can be used further.
  • Alternatively, if the portfolio shows worse results than the benchmark (traders say ‘underperform’), it can show that investors’ decisions were wrong and the investment strategy should be changed.

What are the most popular benchmarks?

Most investors often use S&P 500 and Dow Jones Industrial Average indexes as they are two of the most well-known large-cap stock benchmarks.

What is benchmarking in business?

Benchmarking is a method of measuring the performance of one business against its competitor in the same market. Investors use this concept when they pick the stocks for their portfolio by comparing one company to another.


2024-05-21 • Updated

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