Stock market index

Investing glossary · Markets and instruments

A measure of the performance of a group of stocks, used as a gauge of a market and as a benchmark.

Definition

A stock market index tracks a selected group of stocks to summarize how a market or segment is doing. The S&P 500, for example, follows 500 large US companies. Indices are used as a gauge of the market, as benchmarks to judge managers, and as the basis of index funds and ETFs.

How the index weights its members matters. In a market-capitalization weighted index, bigger companies count for more, so a few giants can dominate. In a price-weighted index, the stocks with the highest share prices count most, regardless of company size. Equal-weighted indices give every member the same weight.

Worked example

Illustrative numbers

Imagine a two-company index. Company A has a market value of $300 and Company B of $100. Market-cap weighting gives A a weight of 75% and B 25%, so a 10% move in A shifts the index three times as much as the same move in B.

This is a toy example of the weighting logic that real indices apply to hundreds of stocks.

How ATLAS uses it

ATLAS uses index-tracking ETFs to represent markets and shows their probabilities and ranges alongside individual stocks.

Frequently asked questions

Can you invest directly in an index?

Not directly, but index funds and ETFs hold the index's stocks, so they give you its return minus fees.

Why do index weights matter?

Because they decide which companies drive the index. In a cap-weighted index, a handful of very large companies can account for a large share of the movement.

Related terms

Put the idea to work on your own stocks

Open any company in ATLAS to see its fair value, its odds of rising and its risk numbers side by side.

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Not investment advice. ATLAS estimates are produced by statistical models from public data; they can be wrong and past performance does not predict future results. Consider your own situation before investing. Disclaimer