# What Is an Index?

> A market index tracks a group of assets with one number. Learn how indexes like the S&P 500 and Dow are built, weighting methods and how traders use them.

Source: https://learn.tradelabsai.com/markets/what-is-an-index/  
Track: Markets and Instruments · Level: Beginner · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "What Is an Index?", https://learn.tradelabsai.com/markets/what-is-an-index/

A market index is a single number that tracks the value of a group of assets. The S&P 500 tracks 500 large US companies, the Dow Jones Industrial Average tracks 30, and the Nasdaq 100 tracks 100 of the largest non financial companies listed on Nasdaq. When people say "the market was up 1% today", they usually mean one of these indexes.

## Why indexes exist

Thousands of stocks trade every day, and each moves for its own reasons. An index summarises them, so you can see at a glance how a market, sector or country is doing. Indexes also serve as:

- **Benchmarks** for judging fund managers and your own returns.
- **The basis for investment products** such as index funds, [[what-is-an-etf|ETFs]], futures and options.
- **A gauge of risk and sentiment**, especially volatility indexes like the [[the-vix|VIX]].

## How an index is built

Every index has a rulebook: which assets qualify, how many are included, how they are weighted and how often the list is updated.

### Weighting methods

| Method | How it works | Example |
|---|---|---|
| Market cap weighted | Bigger companies count more, in proportion to their market value | S&P 500, Nasdaq 100 |
| Price weighted | Higher priced shares count more, regardless of company size | Dow Jones Industrial Average |
| Equal weighted | Every member counts the same | S&P 500 Equal Weight |

**Example: Why weighting matters**
In a market cap weighted index, a 5% move in a $3 trillion company moves the index far more than a 5% move in a $30 billion company. In the price weighted Dow, a $500 stock moving $10 moves the index more than a $50 stock moving $5, even if the cheaper stock belongs to a larger company.

Because a handful of very large companies dominate cap weighted indexes, the index can rise even when most of its members fall. Traders watch market breadth, how many stocks are rising versus falling, to see whether a move is broad or narrow.

### Changes to the list

Index providers add and remove members periodically, for example when a company grows large enough or shrinks too small. Funds tracking the index must then buy or sell, which can move prices around the change date. See [Index Rebalancing](https://learn.tradelabsai.com/fundamentals/index-rebalancing/).

## Major indexes traders follow

| Index | What it tracks |
|---|---|
| S&P 500 | 500 large US companies, cap weighted |
| Dow Jones Industrial Average | 30 large US companies, price weighted, started in 1896 |
| Nasdaq 100 | 100 large non financial Nasdaq listed companies |
| Russell 2000 | About 2,000 smaller US companies |
| FTSE 100, DAX, Nikkei 225 | Leading stocks in the UK, Germany and Japan |
| VIX | Expected 30 day volatility of the S&P 500, from options prices |

## You cannot buy an index directly

An index is a calculation, not a security. To trade it, you use products that track it: index funds and ETFs, index futures such as the E-mini S&P 500, index options, or CFDs where they are legal. See [Index Trading](https://learn.tradelabsai.com/markets/index-trading/).

## How traders use indexes

- **Market direction.** Many traders only take long trades in individual stocks when the broad index is in an uptrend.
- **Relative strength.** Comparing a stock's performance with its index shows whether it is leading or lagging.
- **Hedging.** A trader holding several stocks can sell index futures to reduce exposure to a market wide fall. See [Hedging](https://learn.tradelabsai.com/markets/hedging/).
- **Beta.** A stock's [[alpha-and-beta|beta]] measures how much it tends to move relative to the index.

## Price index vs total return index

Most headline index numbers are price indexes: they ignore dividends. A total return version assumes dividends are reinvested. Over long periods the difference is large, so compare like with like when judging performance.

## Frequently asked questions

### What is the most important stock index?

The S&P 500 is the most widely used benchmark for US stocks and for many global investors, though the Dow and Nasdaq are also closely followed.

### Can an index go down while most stocks go up?

Yes, in a cap weighted index, if a few very large companies fall while many smaller ones rise. The reverse can also happen.

### What does it mean to track an index?

A fund that tracks an index holds its members in roughly the same weights, so its returns closely follow the index, minus fees.

## Sources

- S&P Dow Jones Indices, [S&P 500](https://www.spglobal.com/spdji/en/indices/equity/sp-500/)
- Wikipedia, [Stock market index](https://en.wikipedia.org/wiki/Stock_market_index)

## Continue learning

- Next lesson: [What Is Forex?](https://learn.tradelabsai.com/markets/what-is-forex/)
- Previous lesson: [What Is an ETF?](https://learn.tradelabsai.com/markets/what-is-an-etf/)
- Related: [What Is an ETF?](https://learn.tradelabsai.com/markets/what-is-an-etf/): An ETF is a fund that trades on an exchange like a stock. Learn how ETFs track an index, how they differ from mutual funds, their costs and how to choose one.
- Related: [Index Trading](https://learn.tradelabsai.com/markets/index-trading/): How to trade stock market indexes using ETFs, futures, options and CFDs, what moves indexes, the best times to trade them and how to manage the risk.
- Related: [What Is a Stock?](https://learn.tradelabsai.com/markets/what-is-a-stock/): A stock is a share of ownership in a company. Learn what owning a share gives you, why stock prices move, common vs preferred shares and how to trade them.
- Related: [Index Rebalancing](https://learn.tradelabsai.com/fundamentals/index-rebalancing/): Index rebalancing forces funds to buy additions and sell deletions. Learn how S&P 500 and Russell changes work, the index effect and closing auction flows.
- Related: [Alpha and Beta](https://learn.tradelabsai.com/portfolio/alpha-and-beta/): Beta measures how much a portfolio moves with the market; alpha is the return beyond what that exposure explains. Learn formulas, CAPM, regression and pitfalls.