Indexes are used to represent the performance of a specific segment of the market. For example, the S&P 500 tracks 500 large U.S. companies, while the NASDAQ-100 tracks major technology and growth-oriented firms. Each index follows clear rules about which assets belong in it, how they are weighted, and how often they are updated.
Indexes help investors understand how markets or sectors are performing without needing to follow every individual asset. They serve as benchmarks for comparing investment results, evaluating economic trends, and building financial products such as ETFs and mutual funds. Many indexes use market capitalization weighting, meaning larger companies have a greater influence on the index’s movement.
Indexes can focus on different areas—broad markets, specific industries, regions, market styles (like growth or value), or even commodities. Their standardized structure makes them reliable tools for market analysis. Because they summarize large amounts of data into a single number, indexes are widely used by traders, analysts, and everyday investors.
Indexes offer a simple way to track market performance and compare investment results. They guide portfolio decisions, shape financial products, and help investors understand how different parts of the market are moving.
Each index follows a set of rules known as its methodology. Assets are added or removed based on criteria such as market size, trading volume, sector classification, or financial stability. For example, the S&P 500 reviews companies regularly and updates its list to keep the index representative of the U.S. large-cap market. These rules keep indexes consistent and transparent.
Indexes help investors judge whether their portfolio is performing well. If a fund aims to follow the U.S. stock market, its results can be compared to the S&P 500. If it consistently performs below the benchmark, the investor may question the fund’s strategy. Benchmarks also help measure risk, trends, and long-term market behavior.
There are broad-market indexes like the S&P 500, regional indexes such as the FTSE 100 or Nikkei 225, sector indexes focused on technology or energy, bond indexes tracking fixed income, and specialized indexes based on factors or themes. This variety helps investors analyze specific areas and build diversified portfolios aligned with their goals.
A trader checks the NASDAQ-100 index to understand how large technology companies performed that day. If the index rises, it suggests strong overall movement in the tech sector—even if some individual stocks moved differently.
