What Is an Index?

Where the number called the S&P 500 comes from — and why it behaves differently from the Dow.

In the sentence "the market rose 1% today," the market is an index. An index compresses how a group of stocks moved into a single number. It cannot itself be bought or sold — it is a calculation, not a product.

The Four Big US Indexes

Index	What's inside	Weighting	What it tells you
S&P 500	The 500 largest US companies	Market cap	The broad US market
Nasdaq 100	Nasdaq's 100 largest non-financial companies	Market cap	Tech-heavy growth
Dow Jones	30 selected companies	Price	Historical indicator; narrow
Russell 2000	2,000 small companies	Market cap	Small caps, the domestic economy

Why Weighting Matters

This is the biggest and least noticed difference between indexes.

In a market-cap weighted index, big companies move it a lot and small ones barely at all. In the S&P 500, the largest handful of companies can carry more than a third of the index. "I'm invested in 500 companies" is therefore less diversified than it sounds.

In a price-weighted index — and today only the Dow works this way — the company with the higher share price moves it more. Company size is irrelevant. A $500 stock moves it ten times as much as a $50 stock, even if the second company is ten times bigger. The only justification for this method is that 1896 had no calculators.

How to Invest in an Index

Since the index itself can't be bought, funds that replicate it are used instead:

SPY → S&P 500
QQQ → Nasdaq 100
DIA → Dow Jones
IWM → Russell 2000

These are ETFs. More: What Is an ETF?

Joining and Leaving an Index

Indexes are not static. A company that stops meeting the rules is removed and replaced. News of index inclusion usually lifts a stock — because every fund tracking that index is forced to buy it. This is a purely mechanical wave of buying with no connection to the company's business.

Where You'll See It on This Site

The home page's side column shows four index cards, each with an intraday chart. The Markets screen puts indexes, sectors and Treasury yields side by side; the Market Breadth card shows how many index members are up and how many are down.