Index

A stock market index is a measurement of a section of the stock market, calculated from the prices of selected stocks. Indices serve as benchmarks to measure and report on the performance of specific market segments or the market as a whole. The most famous indices include the Dow Jones Industrial Average (30 large U.S. companies), the S&P 500 (500 large U.S. companies), and the NASDAQ Composite (all stocks on the NASDAQ exchange). International indices include the FTSE 100 (UK), Nikkei 225 (Japan), and DAX (Germany). Indices are constructed in different ways. Price-weighted indices like the Dow give more influence to stocks with higher prices. Market-cap-weighted indices like the S&P 500 give more weight to larger companies. Equal-weighted indices treat all component stocks equally regardless of size or price. Investors use indices for several purposes. They serve as benchmarks against which to measure investment performance - if your portfolio returned 8% but the S&P 500 returned 12%, you underperformed the market. They also provide a quick gauge of overall market conditions; when people say "the market is up," they're usually referring to a major index. Index investing has become enormously popular through index funds and ETFs that track specific indices. These passive investments aim to match the index's performance rather than beat it. Because they don't require expensive research or active management, index funds typically have very low fees, making them attractive for long-term investors. The composition of indices changes over time as companies grow, shrink, or are acquired. Being added to a major index can boost a stock's price as index funds must buy shares to match their benchmark. Understanding indices helps investors track markets, benchmark their performance, and make informed decisions about passive versus active investing.