What is a stock index?
An index is a calculated average of selected share prices, representing a particular market or sector.
You can think of an index as a ‘basket’ of shares that provides a broad sample of an industry, sector or economy. The collective performance of these shares gives a good indication of trends in the overall market they represent.
As well as enabling investors to track changes in the value of a general stock market, indices also provide a useful benchmark to measure the success of investment vehicles such as mutual funds and share portfolios.
Indices to watch
There is an index for virtually every conceivable sector of the economy and stock market. Some of these are known as ‘major stock indices’, such as the Dow Jones Industrial Average (DJIA), the FTSE 100, the S&P 500 or the Nikkei 225
The main indices are provided by leading financial companies. For example, the FTSE 100 is owned by the London Stock Exchange and the Financial Times, while the S&P 500 is operated by financial heavyweight Standard & Poor’s.
Major indices provide the best way to gauge the performance of an industry, sector or whole country’s stock market.
How can I trade a stock index?
Stock indices cannot be traded directly, as they are not products in their own right. They exist only to provide information, so you can’t buy or sell a portion of an index as such.
Instead, investors trade indices through derivatives such as CFDs, futures or options. In fact, stock indices are the most popular form of CFD trading.
At EG we offer short- and long-term positions on a massive range on indices, and you can trade many indices even when the markets are closed. To find out more about this, please visit our trading CFDs module.
These include some of the world’s largest companies. For example, the MSCI World index measures 1500 stocks drawn from every developed market in the world (as defined by the provider, MSCI). This index is often used as a benchmark for global stock funds.
These show the performance of the stock market of a particular country, reflecting investor sentiment on the shares listed in that market. For example, the FTSE 100 represents the UK’s 100 (or around 100) largest companies as listed on the London Stock Exchange (LSE).
These are more specialised indices, designed to track the performance of specific sectors or industries. The Morgan Stanley Biotech Index, for example, tracks 36 US firms in the biotechnology industry.
As well as stock indices, there are indices for other financial markets which affect the economy. Significant examples include:
The US Dollar Index measures the value of the US dollar against selected foreign currencies.
The Continuous Commodity Index includes 17 commodity futures that are continually rebalanced.
The CBOE (VIX) Index measures expectations of near-term volatility. The measurements are derived from S&P 500 option prices.