Stock Market Index
A stock market index tracks the combined price of a group of shares, such as the S&P 500 (about 500 large US companies), the Dow Jones Industrial Average (30 companies) or the Nasdaq Composite. You cannot buy an index itself, only funds, futures or CFDs that follow it.
When the news says “the market rose 1% today”, it is quoting an index — one number summarising how a whole basket of stocks moved. Indexes are the scoreboard for markets, the benchmark for fund managers and the underlying for some of the most traded products in the world. This entry explains what an index measures, how weighting changes the picture and how people invest in or trade an index.
- Category
- Trading Basics
- Reading time
- 4 min
- Also called
- Stock index, Market index, Index
- Updated
Indexes in plain words
A market index tracks how a chosen basket of stocks performs, with the basket picked to represent a whole market or one sector.1
Well-known US examples are the Dow Jones Industrial Average of 30 blue-chip companies, the S&P 500, and the Wilshire 5000, which covers most US-listed companies.1
An index is only a calculation, so you cannot buy it directly. Index funds — mutual funds, ETFs or unit trusts — try to earn about the same return as the index, before fees.2
How an index is built, step by step
Define the market
For example, large US companies, a country, or a sector such as technology.
Choose the members
Rules decide which stocks qualify — size, listing, liquidity.
Weight them
By market value, by share price or equally. See Index Weighting.
Calculate continuously
The index value updates as member prices change during trading.
Rebalance
Members are added and removed on a schedule. See Index Inclusion and Rebalancing.
Track it
Funds, futures and CFDs follow the index for investors and traders.
Worked examples
Example 1 — Reading an index move
+1.5%An index closes at 5,000 one day and 5,075 the next.
| Points gained | 5,075 − 5,000 = 75 |
| Percent change | 75 ÷ 5,000 = 1.5% |
Index levels matter mostly as percentage changes, which show how the whole basket moved.1
Example 2 — Price weighting
Price mattersA price-weighted index holds stock A at $400 and stock B at $40. Each rises 10%.
| A's rise | 10% × $400 = $40 |
| B's rise | 10% × $40 = $4 |
| Effect on the index | A moves it 10× more than B |
The Dow is price-weighted, so its high-priced members move it most, whatever the company's size.3
Example 3 — Owning the index through a fund
≈ +$790You put $10,000 in an index fund. The index gains 8% in a year, and the fund charges 0.10%.
| Index gain | 8% × $10,000 = $800 |
| Fees | 0.10% × $10,000 ≈ $10 |
| Your result | ≈ $790 |
Index funds aim to match the index's return before fees, so costs are the main gap.2 See Expense Ratio.
Three famous US indexes
| Aspect | Members | Weighting |
|---|---|---|
| Dow Jones Industrial Average | 30 blue chips | By share price |
| S&P 500 | About 500 large companies | By market value |
| Nasdaq Composite | Stocks listed on Nasdaq | By market value |
| Wilshire 5000 | Most US-listed stocks | By market value |
How indexes are used
Market gauge
A quick read of how the market or a sector is doing.
Benchmark
Measuring a fund or portfolio against the market. See Benchmark.
Passive investing
Index funds give broad exposure cheaply. See Index Fund.
Trading
Index futures, options and CFDs. See Futures Contract and Contract for Difference.
Advantages and disadvantages
Advantages
- One number summarises a whole market.
- Easy, cheap exposure through index funds.
- A fair yardstick for judging performance.
- Highly liquid trading products track major indexes.
Disadvantages
- Weighting can let a few giants dominate.
- Price-weighted indexes can mislead about company size.
- You cannot buy the index itself.
- A rising index can hide that most stocks fell. See Market Breadth.
Going deeper
Read as far as you need. Each level builds on the one before it.
What the Dow really is
Beginner
The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks and is used as a barometer of how the largest US companies are doing.3
How funds track an index
Intermediate
Index funds mostly buy the stocks or bonds in the index; some hold a representative sample or use options and futures to match it.2 Small differences in return are called tracking error.
Indexes beyond stocks
Advanced
Indexes exist worldwide for bonds, currencies and commodities as well as stocks.3 See US Dollar Index, Commodity Indices and MSCI Indices.
Common mistakes
Comparing index points
A 500-point move means different things on a 5,000 and a 40,000 index — use percent.
Assuming the index is the economy
Indexes reflect listed companies, often a few giants.
Ignoring weighting
Price-weighted and value-weighted indexes can move differently.
Forgetting fund fees
Your return is the index minus costs.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- An index measures how a basket of stocks moves.
- Weighting decides which members matter most.
- You invest in an index through funds, futures or CFDs.
- Indexes are the benchmark for judging performance.
- Read index moves as percentages, not points.
Frequently asked questions
Can I buy the S&P 500?
Why do indexes have different numbers of points?
What makes a company join an index?
Further learning
- Exchange-Traded Fund
The easiest way to own an index.
- Market Capitalisation
The basis of most index weighting.
- Futures Contract
How traders trade index moves.
- Stock
What an index is made of.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Market Indices (glossary) (opens in a new tab) Checked .
- Investor.gov (SEC). Index Fund (glossary) (opens in a new tab) Checked .
- Nasdaq. Dow Jones Industrial Average (glossary) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.