What is an index? (2024)

An index is a securities basket representing a whole market or a submarket. For example, the UK stock index FTSE 100 contains the stocks of the 100 largest and most liquid UK-listed companies.

What is an index? (1)

  • Level: For beginners
  • Reading duration: 5 minutes

What to expect in this article

  • The concept of an index easily explained
  • Index as a measure for markets
  • Securities selection in a stock index
  • Securities weighting in an index
  • Index rebalancing: Re-adjustment of the index

An index is a securities basket representing a whole market or a submarket. It tracks the performance of this market and serves as a benchmark for investors or fund managers.

For example, the UK stock index FTSE 100 contains the stocks of the 100 largest and most liquid UK-listed companies.

The concept of an index easily explained

In addition to equity indices, there are also indices on bonds, commodities or real estate.

In most cases, indices are offered and calculated by large stock exchanges, independent index providers or rating agencies. The most popular index providers are MSCI, S&P, STOXX and FTSE.

Index as a measure for markets

What is an index? (2)

Securities selection in a stock index

Each index is based on fixed rules, which determine which securities are included in the basket. In the case of stock indices, the rules are particularly often based on the following two properties:

  • Stock exchange, on which a company is listed
  • Size of the company (market capitalization)

For example, the FTSE 100 index represents the 100 largest and most liquid UK companies listed on the London Stock Exchange.

In addition, there are many other rules, by which the securities could be selected in an index. For example, the index could contain only companies from certain industries, such as finance, energy or real estate. This allows investors to track the performance of individual sectors in a market.

Securities weighting in an index

In the index rules, the index provider also determines how the weights of the individual companies in the index are determined. This is also known as index weighting.

Most common indices are market cap weighted. In this case, the index weights the individual companies according to their size. Thus, the largest company has the largest weight in the index.

Definition of market capitalisation (stock market value):
Total value of shares of a listed company.
Price * Number of free-float shares outstanding.
The company's own stock is not included in the calculation. This is also known as free float market capitalisation.

The FTSE 100 is also weighted by market cap. Only the freely tradable shares, also know as free float, are relevant. This excludes locked-in shares such as shares held by governments, insiders or others.The resulting market capitalisation is smaller than what would result from a full-market capitalisation method.

Other methods are equally weighted, price weighted or weighted by fundamental selection criteria such as dividend yield. These methods are dealt with in more detailed articles.

Index rebalancing: Re-adjustment of the index

In the case of market cap weighted indices market movements ensure that the weight of the securities in the index changes over time: if the share price of a company increases, its weight in the index also rises.

Indices are not static. For this reason, a regular check of the components takes place at fixed time intervals determined in the index rules. This is also called index rebalancing in the specialist jargon. Companies can leave an index and be replaced by new companies.

In the case of the FTSE 100 Index, the composition and weighting are reviewed on a quarterly basis. Changes happen, for example, when the 100th largest company is "overtaken" by the 101st largest. Then the previously larger company falls out in favor of the new one.

In practice, entire index families have established themselves, since one can divide the world according to a certain schema. Among the most well-known are the MSCI indices.

The following table provides a brief and rough classification of well-known indexes.

IndexShort descriptionWeighting methodCheapest ETF by TERNumber of ETFs
FTSE MIB40 largest Italian companiesFree float market cap weightedfrom 0.30% p.a.4
DAX40 largest German companiesFree float market cap weightedfrom 0.08% p.a.10
EURO STOXX 5050 largest European companiesFree float market cap weightedfrom 0.05% p.a.16
MSCI Worldappr. 1.600 largest companies from developed markets worldwideFree float market cap weightedfrom 0.10% p.a.21
S&P 500500 largest US companiesFree float market cap weightedfrom 0.03% p.a.24
Dow Jones
Industrial Average
30 of the largest US companiesPrice weightedfrom 0.33% p.a.4
Nikkei 225225 of the largest Japanese companiesPrice weightedfrom 0.09% p.a.4

For an excursion into the world of different indices, we recommend our ETF investment guides. Here you will find the most important indices for various investment themes.

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What is an index? (2024)

FAQs

What is the index in a book? ›

An index is found at the back of a book. It alphabetically lists all the major topics, events, people, and places discussed in the book and provides page numbers that direct you to each reference. Indexes can get quite specific and often run for several pages.

What do you mean by index? ›

a. : a number (such as a ratio) derived from a series of observations and used as an indicator or measure. specifically : index number. b. : the ratio of one dimension of a thing (such as an anatomical structure) to another dimension.

What is an index in finance? ›

An index is a group or basket of securities, derivatives, or other financial instruments that represents and measures the performance of a specific market, asset class, market sector, or investment strategy.

What is an example of an index? ›

As mentioned, the Dow Jones, S&P 500, and Nasdaq Composite are three popular U.S. indexes.

When should a book have an index? ›

Indexing is typically done when the interior of the print book is designed and formatted, and the page numbers will no longer change. This means the text is finalized. The only thing that might remain is a final proofread of the formatted manuscript.

How hard is it to index a book? ›

Indexing is a specialized skill that takes a long time to master, and uses expensive software. It's also hard. And because the whole point of an index is to raise the value of your book, an obviously amateur index defeats its own purpose.

What does index mean money? ›

An index tracks the performance of a group of preselected investments, such as stocks. For example, the S&P 500 index tracks the performance of 500 of the largest U.S. companies.

What is the use of an index? ›

An index is a method to track the performance of a group of assets in a standardized way. Indexes typically measure the performance of a basket of securities intended to replicate a certain area of the market.

What does index mean in price? ›

What are Price Indices? A price index (PI) is a measure of how prices change over a period of time, or in other words, it is a way to measure inflation. There are multiple methods on how to calculate inflation (or deflation).

What makes something an index? ›

The exact definition is, “an alphabetical list of names, subjects, etc., with references to the places where they occur, typically found at the end of a book.” If you crack open almost any non-fiction book, you can find one.

How does indexing work? ›

Indexing is the way to get an unordered table into an order that will maximize the query's efficiency while searching. When a table is unindexed, the order of the rows will likely not be discernible by the query as optimized in any way, and your query will therefore have to search through the rows linearly.

Where is index used? ›

Indexes are used to retrieve data from the database more quickly than otherwise. The users cannot see the indexes, they are just used to speed up searches/queries. Note: Updating a table with indexes takes more time than updating a table without (because the indexes also need an update).

What is the main purpose of an index? ›

An index is a list of all the names, subjects and ideas in a piece of written work, designed to help readers quickly find where they are discussed in the text. Usually found at the end of the text, an index doesn't just list the content (that's what a table of contents is for), it analyses it.

What is the difference between content page and index? ›

What is the difference between a table of contents and an index? A table of contents tells you the names of the chapters and where you find each section. An index usually tells you where particular words or expressions are found in a book.

What is the difference between an index and an appendix? ›

appendix: a section of extra information added at the end of a book. index: An index is essentially a roadmap to the book, listing names, places, and things in alphabetical order and giving the page numbers associated with each topic.

What is the difference between glossary and index? ›

A glossary is a collection of words pertaining to a specific topic. In your thesis or dissertation, it's a list of all terms you used that may not immediately be obvious to your reader. In contrast, an index is a list of the contents of your work organized by page number.

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