Lesson 4 of 5 · 6 min read
Indices: what they measure
An index measures in a single number how a basket of shares is doing. The foundation of index investing.
What is an index?
An index tracks a fixed group of shares. Every country has one for its own exchange, and there are global ones too. The S&P 500 tracks the 500 largest American companies, the MSCI World over 1,500 across developed markets. If the index rises, those companies together did well on average. You don't buy an index itself — you track it via an ETF.
Weighting
Most indices are market-cap weighted: larger companies count more heavily. In the S&P 500, the biggest tech companies therefore drive a big part of the movement. A few giants can steer the whole index.
Index investing
Through an index ETF you buy the entire index in one go — broadly diversified and cheap. Historically, broad indices beat most active investors over the long term. That's why a global index ETF is the core of many people's portfolio.
Remember this
- An index measures in a single number how a fixed group of shares is doing together (S&P 500 = 500 companies, MSCI World over 1,500).
- Most indices are market-cap weighted, so large companies weigh the most.
- You don't buy an index directly; you track it via an ETF or index fund.
- Broad indices beat most active investors over the long term.
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