A stock index is stock market indicator. It’s like a thermometer that shows us how most companies in the stock market are performing. Multiple indices dot the globe and are essential to knowing how the price of listed assets varies.
Let’s go back to the late 19th century, when a journalist in the US noticed that the share price of many traded companies fluctuated at the same time. To express those upward and downward trends in the market, he ordered the companies of the time on a type of list that would reflect the price shifts in their stock. Stock indices were born.
What is a stock index?
You can think of a stock index as a basket of many types of products whose individual prices will give us an idea of the general market. It measures the appreciation and depreciation of the stock it lists to help us visualize market behaviour.
We’ve often heard things like “the Spanish stock market is down 0.15%”. That means that shares of the 35 companies on Spain’s benchmark stock index — the IBEX 35 — have lost value. To understand this idea better, check out this article by Finanzas para Mortales (Finance for mortals) (in Spanish).
In sum, a stock index is a number we can use to get an idea of how companies traded on the stock market (which can be from one or many industries) are performing.
What are stock indices for?
Indices are benchmarks that tell us how stock markets are performing. Often, brokers use them to make general comparisons for trading and investment purposes.
As economic indicators, they can guide us through market trends and help us measure returns and risk so we can weigh our options. They can also be useful to build portfolios that mirror their very performance.
They are several institutions, public bodies and private entities that create indices. All of them are usually overseen by their countries’ supervisory bodies.
What are the primary stock indices?
There are a plethora of different stock indices. They can be domestic, European, worldwide; based on the industry or size of the companies they list; or determined by a type of asset. Many are made up of large companies because their shares are widely traded.
The most well-known indices include the Dow Jones (US), Nasdaq (US), the Eurostoxx 50 (Europe) and the Nikkei (Japan), which cover the world’s most important stock markets.
If you want to understand more about long-term investing (for which stock indices are fundamental), read this article by Santander Consumer.