Indices are a measure of a section of shares in the stock market. Indices are created by combining the value of several stocks to create one aggregate value. Major financial indices include the Dow Jones Industrial Average, FTSE 100, CAC 40, and Dax 30. The Dow Jones Index, for example, represents 30 large publically-listed companies traded on the New York Stock Exchange.

Historically, investors needed a way to analyze the overall performance of the market. After all, you could never make a statement on the US economy by only looking at, say, Apple Inc.'s stock. This need begat the stock index, generally a collection of top-performing stocks grouped and averaged to give a quick glance at the market as a whole.

An index is a good way to look at particular markets, but for investors, it offers a way to gauge the performance of their individual portfolios, so underperforming specific investments can be adjusted to be more in line with the general trend of the market.

Indices can have a variety of variables. For starters, the number of stocks in any particular index can vary wildly, from a few dozen companies to thousands. The price of an index is found through weighing. Price-weighted indices are averaged based on the price of each component stock. Capitalization-weighted indices adjust the calculation based on the size of the companies included. Many other factors are represented depending on the stock index in question.

These days, there are hundreds of stock indices globally, representing companies nationally, regionally, globally, and even by industry. Some indices are categorised by the size of the companies they represent, such as the S&P SmallCap 600 and S&P Composite 1500. This helps provide investors with many trading opportunities. Businesses within an index must meet specific criteria. Companies within the S&P 500, for example, must have a certain market capitalisation. Corporate action of individual shares listed on an index can impact the overall value of an index, for example, mergers and the issuing of additional shares. Most large indices are recalculated on a quarterly basis and any constituent share that no longer meets the minimum criteria required to be on the index is dropped and replaced by another share that does.


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