What is a composite index?

A composite index is a wide-ranging index made up of various equities, indices or other items. It's mainly used as an indicator of overall performance of a market or specific sector over time.

Where have you heard about composite indexes?

You’ve heard of the Nasdaq. Its composite index is regularly quoted by the media and comprised of about 3,000 stocks listed on the Nasdaq national market. The largest firms have the biggest impact on its value.

What you need to know about composite indexes

If you want to check price level changes to an entire stock market or business sector, composite indexes are handy tools. The breadth of composites makes them much better indicators of overall market performance than narrow indices that don't have nearly as many components.

Because of that, they offer a useful benchmark to measure your portfolio against. You should be aiming for your portfolio to outperform the main composite indexes.

Composite indexes aren’t just used in investing circles though. They can be used to measure everything from inflation to people's lifespan.