What a stock market index is

A stock market index is a single number that tracks the combined value of a defined group of shares. Instead of following hundreds of companies one by one, you follow the index, and its daily move tells you, roughly, how that slice of the market did. When the news says the market rose 1 percent today, it is almost always quoting an index, not every stock.

The three you hear about most

• The S&P 500 tracks about 500 of the largest US companies. It is weighted by market value, so a company worth two trillion dollars moves it far more than one worth fifty billion. Because it is broad and size-weighted, it is the index most professionals treat as the US stock market.
• The Dow Jones Industrial Average is the oldest and most quoted, but it tracks only 30 large companies and is weighted by share price rather than company size. That quirk means a single high-priced share can swing it, which is why it can tell a different story from the S&P 500.
• The Nasdaq Composite tracks thousands of companies listed on the Nasdaq exchange and leans heavily toward technology, so it moves more when tech does.

Why weighting matters

How an index is weighted decides what moves it. The S&P 500 is capitalisation-weighted: the biggest companies carry the most weight, so a handful of giant firms can dominate its direction. The Dow is price-weighted, an older method that gives more sway to shares with a high dollar price regardless of company size. Neither is wrong, but they measure different things, which is why two indexes can disagree on the same day.

Why indexes matter to you

Even if you never trade, indexes shape your money. They are the benchmark your investments are judged against, the basis for most index funds and ETFs, and a quick read on sentiment and the economy. A fund manager who beat the market beat an index; a pension invested in the S&P 500 holds a fund that copies it. When a headline announces a record high, it is an index setting the record.

How people invest in an index

You cannot buy an index directly, because it is just a measurement. What you can buy is a fund built to match it. An S&P 500 index fund or ETF holds the same companies in the same proportions, aiming to deliver the index's return minus a small fee. For how those funds work and what they cost, see ETF vs mutual fund, and for how shares and bonds fit together, stocks vs bonds. We keep the current S&P 500 level, sourced and dated, on the rates and returns page.

Beyond the big three

Indexes are not only national. There are indexes for sectors, such as technology or healthcare, for company size, such as small caps, for bonds, and for whole regions and the world. The FTSE 100 tracks large UK companies, the Nikkei 225 tracks Japan, and a global index can hold thousands of companies across dozens of countries. Whatever the slice, the idea is the same: one number standing in for a defined group, so you can measure and invest in it as a whole rather than one holding at a time.

The bottom line

A stock market index is a thermometer for a slice of the market: one number standing in for many. The S&P 500 is the broad gauge of US shares, the Dow a narrower and older one, and the Nasdaq a tech-heavy read. Knowing which index a headline is quoting, and how it is weighted, is the difference between understanding a market move and being misled by one. The glossary defines the terms along the way.