A stock index is a performance metric that measures the impact of a single group of stocks over time.
Stock indices are designed to provide investors with an accurate and efficient method of comparing current market values to historical market values. Indices can be used to evaluate both the performance of individual investors and the overall stock market.
Illustrations of stock indices
The S&P 500 index measures the performance of 500 large-cap companies with their headquarters in the United States. It is also a representative sample of the US stock market.
The FTSE 100 index measures the performance of the UK’s 100 largest companies. The FTSE 100 is the most widely used indicator of the UK stock market.
The Nikkei 225 index measures the performance of 225 of Japan’s largest companies and is the most widely followed stock market index in the country.
There are different stock indices
Indices based on the stock exchange
These indices are designed to track the performance of stocks listed on a particular stock exchange. The NASDAQ 100 index, for example, tracks non-financial stocks traded on the NASDAQ exchange.
These indices are designed to track the performance of specific segments of the stock market, such as healthcare or financial stocks.
These indices are designed to represent specific geographical regions. The FTSE developed Asia Pacific Index, for example, tracks the performance of stocks in developed Asia. Meanwhile, the EURO STOXX 50 index tracks the performance of European stocks.
Indices by country
These indices are designed to track the stock markets of individual countries. For example, the S&P 500 index is a broad representation of the US stock market, while the DAX 30 index serves as a barometer of Germany’s economy.
Two types of stock indices exist: those based on market capitalization and those based on price. Greater weight is given to companies with higher market capitalizations (the total value of their shares) in market cap indices. The FTSE 100 and the DAX30 are two well-known examples of market capitalization weighted indices. When using a price-weighted index, the companies with the highest share prices have a greater impact on the index.