What is a stock market index?
What a stock market index is, how it works, and how you can invest in one through an ETF.
What is a stock market index?
Tom & Fred dialogue
On the news, I often hear that “the S&P 500 went up today.” What actually goes up?
Dialogue
On the news, I often hear that “the S&P 500 went up today.” What actually goes up?
A stock market index. It’s a number that shows how the prices of a group of listed companies move, together. Instead of following hundreds of shares one by one, you look at a single number.
And who decides which companies are in the group?
A specialized company called an index provider, following public rules. The S&P 500, for example, includes about 500 of the largest companies in the United States. Also from the US is the Nasdaq 100, with a lot of tech companies.
And in Europe?
There are indices for Europe as a whole. The Euro Stoxx 50 includes 50 of the largest companies in the eurozone, and the Stoxx 600 is the broader version.
What about Asia?
In Japan, there’s the Nikkei 225, in Hong Kong, the Hang Seng, and in South Korea, the KOSPI.
And if I want the big picture?
The MSCI World includes more than a thousand companies from developed countries, across several continents. For emerging countries, like Brazil, India, or China, there’s the MSCI Emerging Markets.
Do all the companies in an index count the same?
Usually not. In most indices, a company counts more the bigger its market capitalization, meaning the total value of its shares on the stock market. So in an index like the S&P 500, a few very large companies can have a big influence on the result.
Can I buy an index?
Not directly, because an index is just a calculation, a list built on rules. But you can buy an ETF that tracks it. Usually, the fund buys the shares in the index in similar proportions, and your investment follows the index, both up and down. An index isn’t guaranteed to rise: it only reflects what its companies do.
So, in short, what’s an index good for?
Two things. It shows you at a glance how a whole market is doing. And it’s the basis for many ETFs, which let you invest in hundreds of companies at once.