Understanding Stock Market Indices
A stock market index tracks a group of shares to give a single number that summarises how that part of the market is doing. When someone says "the market fell two percent", they usually mean an index.
How indices are built
Most major indices are weighted by market capitalization, so larger companies have more influence. This is why a handful of very large technology firms can move the S&P 500 or the Nasdaq 100 noticeably. Others, such as the Dow Jones Industrial Average, use different weighting methods.
Well-known indices
- S&P 500: about 500 of the largest US companies, a common benchmark for the US market.
- Nasdaq 100: 100 large non-financial companies listed on the Nasdaq, with a strong technology weight.
- DAX: large German companies listed in Frankfurt.
- FTSE 100: the largest companies listed in London, many of which earn most of their income abroad.
- Nikkei 225: major companies on the Tokyo Stock Exchange.
- Hang Seng: large companies listed in Hong Kong.
- BIST 100: the largest companies on Borsa Istanbul.
Points, not dollars
An index level is measured in points, not in a currency. A level of 5,000 does not mean 5,000 dollars; it is only meaningful when compared with earlier levels of the same index.
Other index-like measures
The US Dollar Index (DXY) compares the dollar with a basket of other currencies, and the VIX estimates expected stock-market volatility. They are not stock indices in the usual sense, but they are followed for the same reason: they summarise something about the market in one number.
Why they matter
Indices give a quick view of market mood, a benchmark to compare investments against and the basis of many funds. You cannot buy an index directly, but products such as index funds are designed to follow one.
More guides
- What Is Market Capitalization?
- How to Read a Price Chart
- What Moves Currency Exchange Rates?
- Gold, Silver, Platinum and Palladium Explained
- How Cryptocurrency Prices Work
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