What are stock market indices?

Contributor: London Stock Exchange | 

Markets worldwide compute thousands of indices everyday. These indices provide a benchmark of  performance for a particular market or sector. It can help you see how individual shares or sectors compare against average performance. This allow investors to assess whether their portfolios are outperforming or underperforming the market in general. 

An index is a mathematical measurement. Early indices, such as the DJIA, are price-weighted. It means that to calculate DJIA, you only need to an average of its constituents prices. If you prefer the size of the company is not taken into consideration. 

The majority of indices are now weighting different parameters. For instance, the relative market capitalisation of each stock gives a more accurate indication of how a market moves. 

The FTSE 100 is considered the UK’s leading benchmark index. It is a market capitalisation weighted measure of the top 100 UK-listed blue-chip companies with a full listing on the London Stock Exchange. You may have also heard of others, such as Standard & Poor’s 500 (SP500) measuring the top 500 US companies.

Note: Since an index is a mathematical measure, you need a product wrapper such as exchange traded funds (ETFs) to track that particular index.

 

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