What Is A Benchmark?

By Timothy Yslava | Reviewed by Samantha Baltodano

TL;DR:

A benchmark is a standard used to measure or compare the performance of a financial instrument or portfolio. There are different types of benchmarks for different types of investments, such as stocks, bonds, commodities, and currencies. Investors and traders use benchmarks to see how well their investments are doing and to make decisions about buying and selling assets.

What Is A Benchmark?

A benchmark is like a goal or target that we use to measure how well something is doing. 

In this case, we want to measure how well a particular investment or trading strategy is doing. It helps us see if we are on track to reach our financial goals. 

Example

Let's say that someone is investing money in stocks and they want to make a certain amount of money in a year. 

They might set a benchmark of, for example, making a 10% return on their investment. This means that they want their investment to increase in value by 10% over the course of a year. 

Then they can use this benchmark to see if they are on track to reach their goal, or if they need to make some changes to their investment strategy.

Types of Benchmarks - Stocks

There are many different types of benchmarks in trading. 

The most well-known is probably the S&P 500 index, which measures the performance of 500 large-cap stocks listed on the New York Stock Exchange and NASDAQ. 

Other common benchmarks include the Dow Jones Industrial Average, which tracks 30 large-cap stocks, and the Russell 2000, which measures the performance of 2,000 small-cap stocks.

Benchmarks can also be created for specific industries or sectors, such as the NASDAQ Biotechnology Index or the MSCI Emerging Markets Index. 

These benchmarks allow investors to compare the performance of a particular industry or region to the overall market.

Types of Benchmarks - Other Financial Instruments

In addition to stock market benchmarks, there are also benchmarks for other financial instruments such as bonds, commodities, and currencies. 

For example, the Bloomberg Commodity Index tracks the performance of 22 different commodities, while the JPMorgan Emerging Markets Bond Index measures the performance of bonds issued by emerging market countries.

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Benchmarks are important tools for traders and investors because they allow them to assess the relative performance of their investments. 

By comparing the performance of their portfolio to a benchmark, traders can determine whether their investments are outperforming or underperforming the market. 

This information can help traders make informed decisions about when to buy or sell certain assets.

To continue your learning journey, learn how to use a benchmark.

Summary

• A benchmark is a standard used to measure the performance of a financial instrument or portfolio.
• Different types of benchmarks exist for various types of investments, such as stocks, bonds, commodities, and currencies.
• Investors and traders use benchmarks to evaluate the performance of their investments and make buying and selling decisions.
• Benchmarks allow traders to determine if their portfolio is outperforming or underperforming the market.

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