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Introduction to Financial Markets

Lesson 5 of 11

8 min

What are stock indices?

A stock index measures the performance of a selected group of shares.

Instead of looking at one company, an index can provide a broader view of how part of a stock market is performing.

Examples include:

  • S&P 500

  • Nasdaq-100

  • Dow Jones Industrial Average

  • FTSE 100

  • DAX

  • CAC 40

  • Nikkei 225

What does a stock index represent?

An index can represent companies based on factors such as:

  • Country

  • Exchange

  • Industry

  • Company size

  • Market sector

For example, the S&P 500 tracks a broad group of large US-listed companies.

The Nasdaq-100 tracks 100 of the largest non-financial companies listed on the Nasdaq Stock Market according to its methodology.

The DAX tracks major German companies.

Why are stock indices important?

Indices provide a quick way to assess the performance of a wider section of the market.

If a major index is rising, it generally means its component shares are increasing in value collectively, although individual companies within the index may still be falling.

Similarly, a falling index suggests weakness across its component companies overall.

Traders therefore use indices to monitor:

  • Market sentiment

  • Broader equity-market trends

  • Sector performance

  • Regional market performance

Major indices are also frequently referenced by financial news organisations when describing market conditions.

Can an index represent an entire economy?

Not exactly.

A stock index tracks selected listed companies, not every part of an economy.

However, because large listed companies can play an important role in economic activity, major indices are sometimes used as one indicator of investor expectations and business conditions.

They should not be considered a complete measurement of economic health.

Lesson summary

  • A stock index tracks a group of shares.

  • Indices can represent countries, sectors or market segments.

  • Major examples include the S&P 500, Nasdaq-100, DAX and FTSE 100.

  • Index movements provide information about broader equity-market performance.

  • Stock-market performance and economic performance are related but are not the same thing.