Equity (stock) indices are composite measures of stock market performance that typically group together companies within a certain category, to give observers a quick and easy summary of whether that particular group of companies increased or decreased in value over a particular time frame.
For example, the FTSE 100 index comprises the 100 largest companies (by market value, i.e. how much it would cost to buy the entire company) in the U.K. FTSE is a company which used to be owned jointly by the Financial Times and the London Stock Exchange (hence the acronym) and is now wholly owned by the London Stock Exchange. In order to quickly gauge whether the overall U.K. stock market went up or down on a given day, investors can look at whether the FTSE 100 went up or down on a given day. There are more than 100 companies listed on the London Stock Exchange, however, so those companies are captured by the FTSE 250 or FTSE All Share, or by another index provider such as MSCI.
The S&P 500 index is a close equivalent to the FTSE 100 but for the USA. There is a more complicated set of rules for a company to be part of the index, but it can broadly be described as containing the largest 500 companies in the US. The S&P 500 is arguably the most important gauge of general stock market performance globally, given the importance of the US economy in a global context. The EuroStoxx 50 is a European equivalent. When people talk about ‘the market’ being up or down, they’re normally referring to one of these indices, or another regional equivalent.
There are hundreds of different stock indices by many different providers with many different sets of rules for membership. And it doesn’t stop with the stock market; there are also bond market indices, commodity indices, real estate indices, etc. These days there’s an index for most investible things.
Indices are used for multiple purposes: as benchmarks for performance of an active fund, as underlying references for derivative contracts and as references for passive funds that track the indices, to name a few important ones.
We refer to lots of linked posts in this post. We hope that by following the links you can answer any questions you might have, but if anything is unclear in this post, or you have any questions relating to anything investment-related, please submit comments or questions in the section below and we’ll do our best to answer them.
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