What Is a Stock Market Index? Why It Matters to Investors
A stock market index is a basket of stocks used to judge the market as a whole. Here's how indexes work, what types exist, and why many investors simply buy the index.
What it is
An index is a calculated figure that tracks the value of a set of stocks. When people say "the market rose 1%," they usually mean the country's main index.
Well-known indexes
| Index | What it tracks |
|---|---|
| S&P 500 | 500 large US companies |
| Nasdaq-100 | Large non-financial companies listed on Nasdaq |
| Dow Jones | 30 large US companies |
| MOEX Russia Index | Large Russian companies |
More about the main US index in the article what is the S&P 500.
How it's calculated
- By market cap: larger companies carry more weight. Most indexes work this way.
- By price: higher-priced stocks carry more weight (this is how the Dow Jones is calculated).
- Rebalancing: companies are periodically added and removed.
How to invest in an index
You can't buy the index itself; it's just a number. But there are ETFs and BPIFs (Russian exchange-traded mutual funds) that replicate an index's composition. With one purchase, you get a stake in dozens or hundreds of companies, which is a simple way to diversify. More in the lesson bonds and ETFs.
Indexes fall too, sometimes by tens of percent and for a long time. Index investing is a strategy for years, often combined with regular purchases.
Aspiro Invest is a medium-term portfolio: what to hold, when to review it, and where the protective levels are.
- An index is a basket of stocks used to judge the market.
- You can invest through ETFs and BPIFs.
- Indexes fall too, so it's a strategy for years.
Frequently Asked Questions
Can I buy an index directly?
No, an index is a calculated number. You invest in it through funds that replicate its composition or through derivatives.
Why do so many people recommend index funds?
They offer broad diversification and low fees, and most active managers struggle to consistently beat the index.
Is an index safe?
Safer than a single stock thanks to diversification. But the whole market can fall too, and drawdowns can be deep.
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