What is a stock market index?
In one line: An index is one number that tracks the prices of a chosen group of stocks, like the S&P 500, to show how that part of the market is doing.
A simple example
Picture a tiny index of just 2 companies:
- Company A is worth $90 billion.
- Company B is worth $10 billion.
In a "market-cap weighted" index, A makes up 90% and B makes up 10%. If A rises 2% and B falls 2%, the index rises about 0.9 × 2% − 0.1 × 2% = 1.6%.
The big company moves the index much more than the small one. That's how the S&P 500 works.
The 3 best-known US indexes
| Index | What's in it | How it's weighted |
|---|---|---|
| S&P 500 | About 500 large US companies | By company size (Market cap) |
| Dow Jones Industrial Average | 30 large US companies | By share price |
| Nasdaq Composite | Most stocks listed on the Nasdaq exchange, heavy in tech | By company size |
Why it matters
An index is the quick answer to "how's the market today?" It's also the backdrop for every stock you look at. When the whole market falls, most single stocks feel it too.
You can't buy an index itself. People trade it through an ETF that tracks it, or through futures like the E-mini S&P 500. The futures tick value calculator shows what each move is worth. More in how the stock market works.
A common mistake
Thinking "the market is up" means most stocks are up. In a cap-weighted index, a handful of giant companies can carry the number. The index can rise on a day when more of its stocks fell than rose.
The Dow is weighted by share price, not company size. A $500 stock moves it more than a $50 stock, even if the $50 company is bigger.
Questions
What is the difference between an index and an ETF?
An index is a list and a number. An ETF is a fund you can actually buy that holds the stocks to track that number.
How many stocks are in the S&P 500?
About 500 companies. The count is a little over 500 shares, because a few companies have more than one class of stock.
Can you trade an index directly?
Not directly. You trade a product that follows it, like an index ETF, index futures or index options.
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