Index

An index is a single number built from the prices of a group of assets, used to represent how that whole group is doing at a glance. Instead of watching hundreds of individual stocks, you watch one number that moves up or down as a stand-in for the group.

To build one, someone picks a basket of assets (say, 500 large US companies) and a formula for combining their prices into one figure. Common formulas weight each company by its total market value (market capitalization), so a huge company like a major tech firm moves the index more than a small one. Others weight by share price alone, or give every member equal weight. The result is reported as a level, like "4,500 points," and what matters day to day is the percentage change in that level, not the raw number itself.

The nuance that trips people up is that an index is not something you can buy directly — it's a calculation, not a security. You can't place an order to "buy the index" the way you buy a stock. What you actually trade are products built to track it: index funds, ETFs (exchange-traded funds that hold the underlying basket), futures contracts, or options. Each of those tracking products has its own price, fees, and quirks, so they only approximate the index's movement rather than matching it exactly.

Another point of confusion is that two indexes can claim to measure "the market" and still disagree, because they use different baskets or different weighting methods. A price-weighted index and a market-cap-weighted index tracking the same 30 companies can move differently on the same day, simply due to the math behind them.