How To Make An Index

Index: Definition

Broadly speaking, an index is an indicator or measurement of something. In investing, an index tracks the performance of a group of assets or a basket of securities, such as a list of publicly traded companies and their stock prices. Investors use indexes as a benchmark to gauge the performance of any one stock, bond or mutual fund against overall market performance.

The S&P 500 and the Dow Jones Industrial Average are two of the most well-known stock market indexes. While these indexes track the broad market and large company stock movements, other indexes may track only a certain industry or market sector.

In publishing, an index is an alphabetical list of names and topics that often appears in nonfiction books. In science and economics, an index is a statistical number used to measure changes over time (think: UV index, air quality index or the Consumer Price Index). Variable interest rates for certain financial products, like adjustable-rate mortgages, often rise or fall based on a specific indexed rate.

Index investing: Index funds and ETFs

Individual stocks and actively managed mutual funds attempt to "beat" the market — that is, perform better than their benchmark indexes. But these attempts often fail, and more investors are using passive investing strategies: index funds or exchange-traded funds that aim to mirror broad-market or sector performance rather than beat it.

Index funds and ETFs are funds that hold stocks that are representative of an entire index, such as the S&P 500, so that the performance rises and falls alongside that benchmark index. As index values tend to rise over time, index funds and ETFs have become an important way that investors build long-term wealth.


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Stock index examples

Here are some common indexes that investors — as well as a range of index funds and ETFs — follow:

S&P 500 Index: The S&P 500 tracks the market moves of around 500 of the largest publicly traded companies in the U.S. The index is a representation of leading companies in leading industries and is capitalization-weighted, which means each stock is weighted proportionately to the company's market capitalization. For example, a company whose total shares are valued at $100 billion is weighted more heavily than a $10 billion company.

Dow Jones Industrial Average: The DJIA follows the performance of the 30 largest U.S. companies, also known as "blue chip" stocks. Market capitalization is not considered in this index.

Bloomberg Barclays U.S. Aggregate Bond Index: Also known as the Agg, this is a broad index that tracks the U.S. bond market. The index measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market.

Nasdaq Composite Index: The Nasdaq tracks the performance of more than 3,000 technology-related companies.

Russell 2000 Index: This index tracks 2,000 smaller — also known as small-cap — companies with market capitalization between $300 million and $2 billion.