What is a Stock Market Index?

A stock market index is simply a fund that tracks a basket of stocks and its composite performance as a “group”.

The most commonly cited stock market indexes are The Dow Jones Industrial Average (Tracking most industrial companies in the US), The S&P 500 (The index tracking the performance of Standard & Poor’s most popular basket of equities) and the Nasdaq (Tracking the performance of technology stocks). Although these indices are baskets, for a consumer to buy one of these baskets they will typically need to purchase shares of an ETF like the SPY in order to acquire exposure to the S&P 500. This often the easiest way to gain exposure to these stock market indices.

The Russell 2000 is also a closely tracked index by most investors (although not nearly as much as the top 3). The Russell is a basket of small cap companies and a great measure of how small businesses are performing. These small cap companies show how the little guy tends to be doing and offer insights into that.

How Many Stock Market Indices Are There?

In total there are a large number of indexes, tracking everything from the VIX (Volatility Index) to the top stocks in Germany, England, Hong Kong, Italy, etc. For the most part, investors use indexes to track the performance of funds via sector, country, etc. For example, Standard & Poor’s has indexes for each market sector (i.e. consumer discretionary, technology, retail, utilities, financials, etc.)

Indexes can be weighted by market capitalization, be equal weighted and can also be weighted by the price of the underlying stocks.

Are There Benefits to Investing Via Index Funds?

The benefit of investing via an index fund is that it allows you to diversify into a basket of equities, without having the risk associated with exposure to price fluctuations from an individual stock. In this regard, it allows investors to diversify for little to no cost and helps keep investors away from single stock exposure and risk. However, there are some investors who still prefer solo picking stocks and for some that may be a better strategy.

The S&P 500 is the main benchmark most investors use to judge the portfolio of their performance. If your portfolio is outperforming the S&P 500, you’re doing a great job.