You won’t find these indexes in the back of a book. A stock market index, rather, is like a measuring stick for the stock market.
What is an index?
If the stock market is a giant jigsaw puzzle, you can think of an index as a magnifying glass. Depending on which magnifying glass you use, you can take a closer look at certain pieces or portions, giving you a clearer picture of the finished product.
In other words, an index is a tool that helps you gauge the stock market.
But before we get too far into the weeds, let’s start with the stock market, which is where stocks, bonds, and other assets are bought and sold, like the New York Stock Exchange.
When talking about the stock market, you generally hear people using a stock market index in reference to the market’s performance.
A stock market index, then, is an index, or measurement, of a market. Specifically, an index is a tool (like a magnifying glass) used to examine, express, or describe what’s happening in a stock market.
An index is simply a curated list of certain securities. A security is an investment product, including stocks, bonds, and mutual funds.
Who creates an index?
An index can be created by anyone interested in tracking a particular group of securities. However, the reputation of the index provider factors into how much weight it carries as a measure of the market, industry, or group of companies.
Some of the biggest providers of indexes are S&P Dow Jones Indices and FTSE Russell.
How does an index work? Like a playlist.
Indexes can be incredibly diverse. Just like a Spotify playlist.
Perhaps the most well-known and referenced index is the S&P 500, which is a list of the large companies whose shares are most traded on the NYSE and NASDAQ. If it were a playlist, it would include the 500 songs that are listened to the most on Spotify, regardless of genre.
The companies represented in the S&P 500 range wildly, from 3M to Apple. While 3M trades on the NYSE and Apple trades on the NASDAQ, but they are both represented on the S&P 500 “playlist” because of their size and trade volume.
Other indexes track entire industries like clean energy, aerospace, and fossil fuels — all of which could be “playlists” of hip-hop, EDM, or classic rock artists songs.
These are some of the most important and referenced indexes in the financial world. If you remember any indexes, it should include these: