Stock Index

A stock index combines the prices of many shares into a single figure showing how a market is moving. The S&P 500 and Nasdaq are examples.

There are two main construction methods. Weighting by market capitalisation is most common; weighting by share price also exists. The same market can look different depending on the method.

Indices serve as the benchmark for performance. Whether your return was good can only be judged against one, and fund performance is almost always measured this way.

They have also become investable. Index funds and ETFs tracking them made buying the whole market, rather than picking individual shares, a widespread approach.

Note that an index captures only part of a market. When a handful of top holdings dominate the weighting, the index's movement is driven by those few. It is worth checking what it holds and in what proportion.