Index

A stock market index is like a scoreboard that tracks how a specific group of companies is doing. It does not own stocks; it simply measures how well a certain part of the market is performing.

Think of an index like a big summary. Instead of checking thousands of companies one by one, you look at one number that shows how that whole group is doing.

Why Indexes Exist

The stock market has thousands of companies, and it would be overwhelming to follow all of them individually. Indexes make the market easier to understand by giving you a simple snapshot. They help answer questions like:

  • Are big U.S. companies doing well? (The S&P 500)

  • Is the technology industry strong or weak? (The Nasdaq)

  • Are smaller, local companies growing? (The Russell 2000)

How an Index Works: The "Weighting" Rule

Each index has rules about which companies belong in it. Once chosen, the index uses a formula to combine all their stock prices into one score.

  • Score Goes Up: The companies as a group increased in value.

  • Score Goes Down: The group decreased in value.

Pro Tip: In 2026, most indexes are Market-Cap Weighted. This means massive companies (like Microsoft or Nvidia) have a bigger impact on the score than smaller ones. If a "giant" company's stock drops, the whole scoreboard might turn red, even if most other companies had a good day!

The "Big Three" You’ll See on the News

  1. S&P 500: The top 500 largest U.S. companies. This is the "gold standard" for the whole economy.

  2. NASDAQ-100: The tech leaders. If you use an app or an AI tool, it’s probably on this list.

  3. Dow Jones (The Dow): 30 massive "Blue Chip" companies that have been around for a long time.

Index vs. ETF (The Important Difference)

It is vital to remember: An index is just a measurement. You cannot buy it.

  • To invest in an index, you buy an ETF (Exchange-Traded Fund) that copies it.

  • If the index rises, the ETF that tracks it usually rises too.

Index (The "List") ETF (The "Product" You Buy)
S&P 500 Index SPY (or VOO) follows it
NASDAQ-100 Index QQQ follows it
Russell 2000 Index IWM follows it

Why Investors Use Them

Indexes are tools. They help you see the "Big Picture" and judge how well your own investments are performing compared to the rest of the world.

Famous Stock Market Indexes

S&P 500 Index

NASDAQ-100 Index

Tracks 500 of the largest companies in the United States.
Often viewed as the best representation of the U.S. stock market.

Tracks 100 large non-financial companies on the NASDAQ exchange, mostly technology companies.
Shows how the tech sector is performing.

Dow Jones Industrial Average (The Dow)

Russell 2000 Index

Tracks 30 large, well-known companies.
One of the oldest and most famous indexes.

Tracks 2,000 small-company (small-cap) stocks.
Used to understand how small businesses in the stock market are doing.

FAQs

  • Yes. If it becomes too small or weak, it may be removed and replaced with a stronger company.

  • Because each index is designed to measure a specific part of the market—large companies, small companies, tech companies, and more.

  • No. You invest in ETFs or mutual funds that track the index.

  • It represents most of the U.S. stock market, making it a good indicator of overall economic health.