backgroundbackground

Indexes

In simple terms, stock indexes are like scoreboards for the stock market. They track a group of stocks—sometimes dozens, sometimes thousands—to show how those companies are doing overall. Think of them as a quick snapshot of a market or a part of it, like the U.S. economy or the tech sector.
background

For example, the S&P 500 follows 500 big U.S. companies, and if their stock prices go up, the index number rises too. It’s a way to measure performance without watching every stock individually—sort of like checking the average grade of a class instead of every student’s report card. Investors use them to see trends, compare investments, or follow funds that copy the index.

Stock indexes are benchmarks that track the performance of a group of stocks, representing a market, sector, or economy. They come in different flavors:

  • Broad Market Indexes: Cover a wide range of stocks (e.g., all major companies in a country).
  • Sector Indexes: Focus on specific industries (e.g., technology or healthcare).
  • Weighted Indexes: Emphasize certain stocks based on criteria like market capitalization (price x shares) or price alone.
  • Equal-Weighted Indexes: Treat all stocks the same, regardless of size.
  • Global Indexes: Span multiple countries or regions.
  • S&P 500: Tracks 500 large U.S. companies, market-cap weighted (e.g., Apple, Microsoft).
  • Dow Jones Industrial Average (DJIA): 30 major U.S. firms, price-weighted (e.g., Boeing, Goldman Sachs).
  • NASDAQ Composite: Heavy on tech, includes all stocks on the NASDAQ exchange (e.g., Amazon, Tesla).
  • FTSE 100: Top 100 UK companies by market cap.
  • MSCI World: Global index covering large and mid-cap stocks across developed markets.

Indexes aggregate data like stock prices, market capitalization, and trading volume into a single number, updated in real-time or daily. For example:

  • The S&P 500 might sit at 5,000 points, reflecting the collective value of its 500 stocks.
  • Data comes from exchanges (e.g., NYSE, NASDAQ), weighted by rules (e.g., market cap for S&P 500).
  • Investors use this to gauge market trends, compare returns, or track funds like ETFs that mimic indexes.
  • Not Investable Directly: You can’t buy an index; you invest via funds (e.g., S&P 500 ETF).
  • Weighting Matters: A few big stocks (e.g., Apple in the S&P 500) can sway a market-cap-weighted index.
  • Economic Signal: Indexes reflect investor sentiment and economic health, but they’re not the whole picture.
  • Volatility Varies: Broad indexes (S&P 500) are steadier than sector ones (e.g., tech-heavy NASDAQ).
  • Check the Makeup: Know what’s in an index—30 stocks (DJIA) tell a different story than 500 (S&P 500).