A stock index is a group of shares that are used to give an indication of a sector, exchange or economy. Usually, a stock index is made up of a set number of the top shares from a given exchange.
Some well-known stock indices include:
- The FTSE 100, the 100 biggest companies on the London Stock Exchange by market cap
- The Dow Jones Industrial Average, the top 30 companies on the New York Stock Exchange and NASDAQ
- The DAX, 30 major German companies on the Frankfurt Stock Exchange.
As a tracker of several stocks, a stock index itself does not have any inherent value. Instead, an index will move in points and reflect the stock prices of all of its underlying assets. Some stock indices will give equal weight to all the stocks they contain, whereas some will give larger prominence to larger stocks.
To trade a stock index, traders have to either use a tracking fund or a derivative like a spread bet, CFD, future or ETF. These products all offer different methods of trading on the price movements of stock indices without having to buy multiple stocks at once.