What is a stock index?
A stock market index is a measurement of the overall value of the stock market, or a section of it, based on average prices. It's a weighted average, so more expensive stocks hold more weight and have a greater influence on the index than lower priced stocks.
Where have you heard about the stock index?
Investors use the stock index to describe the state of the market and to compare the return on various investments. The index is also used to discuss the health of the economy. You've probably heard of the FTSE 100 index and the Dow Jones.
What you need to know about the stock index...
You can't directly invest in a stock market index, as this is just a measurement of value, rather than an actual asset. However, you can invest in index funds that 'track' a particular index. Investors can also use stock indices as tool to evaluate the overall performance of the market or the relative performance of a particular stock.
Some stock indices are global, like the S&P Global 100, and they track the performance of large multinational companies across different regions. Others look at a particular region, for example the FTSE Developed Asia Pacific Index. Then there are national indices, like the FTSE 100 or the Dow that only track firms listed within a specific country.
There are indices that are based on the stocks listed on a particular exchange, the NASDAQ-100 for instance, and there are indices that are based on a number of exchanges, like the Euronext 100. There are also specialised indices which track only companies within a specific industry, such as biotech or real estate.