Indexes are composites that measure price changes using a standardized unit of measurement to track the overall direction of the collection of securities or financial markets. Indexes may be broad and encompass a wide variety of a country’s corporations or focus on smaller sectors, such as technology or financials.
Indexes tend to be grouped by the market capitalization of the companies measured. Market capitalization is determined by multiplying the price of a stock by the number of shares outstanding.
Market capitalization sizes are classified as small, mid, large, or mega. The criteria vary from index to index but follow the same general guidelines.
Mega cap stocks may be the fifty largest companies in a broad index or have a market capitalization of at least $200 billion. Large-cap stocks typically have a market cap of at least $10 billion, mid-cap stocks range between $2 billion and $10 billion, and small-cap stocks are between $250 million and $2 billion.
Indexes are essentially a large portfolio of assets that cannot be invested in directly. Indexes provide a relative benchmark in which to measure current performance against past performance or a portfolio manager’s performance.
Indexes are occasionally rebalanced, and some companies are added to the index while others are removed.
Index funds track a particular stock market index, such as the S&P 500, in an attempt to replicate the performance returns of the broad market index.
S&P 500 Index
The S&P 500, or Standard and Poor’s 500 index, comprises the 500 largest companies in the United States based on market capitalization and represents multiple major sectors within the U.S. economy.
The S&P 500 is commonly used as the benchmark for the US stock market as a whole due to the amount of diverse, large-cap companies within the index. The index is rebalanced quarterly.
Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA) consists of 30 companies and is often referred to as the Dow 30. All of the Dow’s companies are considered “blue chip” stocks and are the largest and most successful corporations in America.
Although the S&P 500 gives a more comprehensive view of the overall economy in the United States, the Dow Jones is often quoted as the standard for the stock market. The index is price-weighted, where higher-priced securities weigh more heavily and is rebalanced every two years.
The Nasdaq composite is an index that includes more than 2,500 companies and, like the S&P 500, is a market capitalization-weighted index. The Nasdaq encompasses a broad range of companies, including international corporations, American depository receipts, REITs, and more.
The Nasdaq is most heavily weighted in technology, with more than 50% of the companies tech-based, and includes many other sectors, such as healthcare, financials, consumer services, and others. The Nasdaq is often listed with the S&P 500 and Dow Jones as benchmarks for the American stock market, specifically as it pertains to technology. The index is rebalanced semi-annually.
Russell 2000 Index
The Russell 2000 index consists of approximately 2,000 small-cap companies taken from the bottom two-thirds of the Russell 3000 index, which is made up of nearly every publicly traded company in the United States. Investors use the Russell 2000 as a benchmark for the performance of small-cap companies.
Unlike the large-cap indexes, the Russell 2000 is weighted by shares outstanding instead of market capitalization. The Russell 2000 primarily focuses on smaller U.S. companies. The index is rebalanced annually.
FTSE 100 Index
The FTSE is the Financial Times Stock Exchange Group. The FTSE oversees multiple indexes, including the Russell in the United States. The FTSE 100 index is a portfolio of stocks comprised of 100 blue-chip companies listed on the London Stock Exchange.
The FTSE 100 is widely used as a benchmark for markets in the United Kingdom. The index is market-cap weighted and rebalanced quarterly.
The DAX Index, or Deutscher Aktien Index, is the German version of the Dow Jones. The DAX tracks the 30 largest stocks on the Frankfurt Exchange. Along with the FTSE 100, the DAX is considered a leading indicator of the European stock market.
The companies on the DAX are located in Germany but have multinational business dealings throughout the European Union and globally. The 30 companies within the DAX cover multiple sectors and industries. The index is rebalanced regularly, though companies may be removed and replaced with new corporations if they are no longer listed in the top 30.
Euro STOXX 50 Index
The EURO Stoxx 50 Index is a market-capitalization-weighted index that includes 50 of the largest companies from the 11 countries that use the Euro as their currency. The index typically represents approximately 60% of the total Euro Stoxx index. The index is rebalanced annually.
CAC 40 Index
The CAC 40 Index is a French stock market index that tracks the 40 largest companies in France based on market capitalization. The CAC 40 is used as a benchmark for the French stock exchange Euronext Paris. The index is rebalanced quarterly.
S&P ASX Index
The S&P ASX tracks the 200 largest companies in Australia, based on float-adjusted market capitalization. The S&P/ASX 200 Index is the Australian version of the S&P 500. It is considered the benchmark for the Australian stock market.
Float-adjusted market capitalization is calculated by taking an equity’s price and multiplying it by the number of shares outstanding in the market. The index is rebalanced quarterly.
Nikkei 225 Index
The Nikkei 225 Index tracks the largest companies traded on the Tokyo Stock Exchange in Japan. The index is a price-weighted index, where the prices of every company included are added together and divided by 225 to calculate the value of the index. This occurs every five seconds as the value of the underlying companies changes throughout market hours. The Nikkei is rebalanced annually.
The Shanghai Index, or SSE Composite (Shanghai Stock Exchange), consists of all the A and B shares traded on the exchange. A shares are stocks of mainland Chinese companies and are quoted in the RMB currency in China, while B shares are quoted in multiple currencies and can be bought and sold by international investors. The index tracks the performance of all the companies listed on the Shanghai exchange.
China A50 Index
The China A50 Index is also run by the FTSE and consists of the 50 largest A share companies listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange. The top 50 companies traded on the Shanghai Stock Exchange are included in the SSE 50 Index and the top 100 companies on the Shenzhen Stock Exchange are included in the SZSE 100.
Hang Seng Index
The Hang Seng Index, or HSI, is a market-capitalization-weighted index that includes the largest companies traded on the Hong Kong Exchange. It is considered the benchmark for blue-chip stocks that trade in Hong Kong. The index is divided into four sectors: industry, finance, real estate, and utilities. The Hang Seng Index uses a free-float market capitalization weighting. It places a 10% cap on any one component's index weight so no single stock can over-represent the index. The index is rebalanced quarterly.
Nifty 50 Index
The Nifty 50 refers to an index on the National Stock Exchange of India, or NSE. The Nifty 50 includes some of the largest companies in India spread out amongst 14 diversified sectors. It is considered the benchmark equity index for India. The Nifty 50 uses free-float market capitalization weighting.
The RTS Index is the Russian Trading System and uses free-float market capitalization weighting for the top 50 stocks traded on the Moscow Exchange. The index is rebalanced quarterly.