Stock market index

An index provider chooses a set of shares according to published rules, such as the largest companies listed in one country, and calculates a single figure from their prices. Most major indices are weighted by free-float market capitalisation, so larger companies move the index more. Some older indices are price-weighted, meaning a share with a higher price has more influence regardless of company size, and some are equal-weighted. An index starts from an arbitrary base value, so what matters is its percentage change over time, not the number itself.

Indices serve as benchmarks for judging fund managers and as the targets that index funds and ETFs try to replicate. You cannot invest in an index directly; you buy a fund that tracks it, and fund costs mean your return will differ slightly. Headline index figures usually show price changes only. A total return version, which assumes dividends are reinvested, gives a fairer picture of what investors actually earned, and over long periods the gap between the two can be large. The rules matter too: two indices covering the same market can perform quite differently.