Glossary
Market index
A calculated value that tracks a group of securities, such as the S&P 500, used as a benchmark and as the basis for index funds.
On this page
A market index is a number calculated from the prices of a defined group of securities to represent how that slice of the market is performing. The S&P 500, the Dow Jones Industrial Average, the Nasdaq-100 and the Russell 2000 are the best-known US examples. Indexes serve as scoreboards for the market, as benchmarks for judging fund managers, and as the recipes that index funds and ETFs copy.
How it works
An index provider publishes rules for which securities qualify, how each is weighted and when the list is reviewed. Weighting is the biggest design choice:
- Market-cap weighted: larger companies count more. The S&P 500 uses float-adjusted market cap.
- Price weighted: higher-priced shares count more, regardless of company size. The Dow works this way.
- Equal weighted: every member counts the same, rebalanced periodically.
A divisor converts the weighted sum into the published level, and the provider adjusts it for splits, spinoffs and membership changes so those events do not make the index jump.
What to keep in mind
You cannot invest in an index directly; you buy a fund that tracks it, which costs fees and may lag slightly. Headline index levels usually exclude dividends; total-return versions add them back, which makes a large difference over decades. And an index is a set of rules, not a neutral measure of "the market": its methodology shapes what it shows.