What an index is
A market index is a calculated measure that tracks a selected group of assets. Indices can represent large US shares, global bonds, emerging markets, technology stocks, and many other segments.
Investors use indices to summarize markets, measure performance and build passive products such as ETFs and index funds.
How weighting changes behaviour
An index may be market-cap weighted, price weighted or equally weighted. In a market-cap weighted index, larger companies have more influence. In a price-weighted index, higher share prices have more influence, regardless of company size.
These rules can make two indices of “the same market” behave quite differently.
The tech-heavy index moves more sharply because a different group of companies dominates the index.
Common examples
The S&P 500 tracks a broad set of large US companies and is widely used as a benchmark. The Nasdaq Composite includes many technology-oriented businesses and can be more growth-sensitive. The Dow Jones Industrial Average is older, narrower and price weighted.
Outside the US, many countries and regions have their own major indices that help investors compare performance and market structure.
Why indices matter to investors
Indices give context. An investor can ask whether a portfolio beat, matched or lagged a suitable benchmark. They also provide low-cost passive investing routes when accessed through index funds or ETFs.
However, an index is not automatically “safe”. It still carries the risks of the market segment it tracks.
Worked idea: not all US indices mean the same thing
A headline saying “the market was up” may hide important differences. If large technology firms perform strongly, the Nasdaq may rise more than the Dow. Knowing what each index contains prevents oversimplified conclusions.
Main takeaways
- Indices track selected groups of assets using defined rules.
- Weighting methods change how an index behaves.
- Different indices provide different lenses on the market.
- Index products can offer simple, diversified access to markets.
Questions to test understanding
- What is a market-cap weighted index?
- Why might two US indices move differently?
- How are indices useful to passive investors?