Stock index
Family I · Instruments
Not to be confused with index, limit stock order, n index.
Stock index is a statistical measure that aggregates the prices of a selected group of listed companies into a single number, allowing comparison of market segments over time. The index level is computed from constituent prices using a published formula, which may weight by market capitalisation, price, or equal weighting. An index is not itself a security; exposure is obtained through derivatives, funds, or other instruments that reference it.
Construction and weighting
An index provider defines the constituent list, the eligibility rules, and the weighting method. Common approaches include:
- Market-capitalisation weighting: each constituent's influence is proportional to its total market value.
- Price weighting: influence is proportional to the share price alone, so high-priced stocks dominate.
- Equal weighting: every constituent receives the same initial weight, with periodic rebalancing.
The index value is typically expressed relative to a base date and base level, so that the number reflects cumulative change rather than an absolute price.
Worked example
A two-stock price-weighted index has a base level of 100 and a base divisor of 2. The current prices are 50 and 100.
The index stands at 75, indicating a 25% decline from the base level of 100.
Usage and caveats
Indices are used as performance benchmarks, as the underlying reference for index funds and exchange-traded products, and as the settlement basis for futures and options. Because an index is a calculated figure, it cannot be bought or sold directly; any tradable exposure involves a separate contract or fund with its own fees, tracking error, and counterparty arrangements. The exact composition and calculation methodology are set by the index provider and can change over time.
Often confused with
- index
- A stock index is a specific type of index limited to equities, whereas an index can track any asset class such as bonds, commodities, or currencies; the visible sign is the constituent list, which for a stock index contains only company shares.
- limit stock order
- A limit stock order is an instruction to buy or sell a specific stock at a specified price or better, while a stock index is a calculated benchmark that is not directly tradable; the visible sign is that an order has a price and quantity, whereas an index has a level and a constituent list.
- n index
- An n-index is a custom or non-standard index variant defined by a particular provider, whereas a stock index follows a broadly recognised methodology for a defined equity basket; the visible sign is the presence of a provider-specific label or formula in the n-index name.