What is an index?

Ryland Goldman - Thursday, April 29th, 2021

Investors need a way to keep track of the thousands of stocks that can be traded with just a quick glance, rather than looking up all the companies. This can be done easily using collections of stocks called indexes.

You can’t buy or sell an index, but you can trade funds which track an index. Using funds is a great and easy way to obtain a diversified portfolio. There are many indexes, but let’s take a look at the four most common, the S&P, Dow, Russell 2000, and Nasdaq.

Standard and Poor's 500 Index
The S&P 500 index, or the S&P, is a collection of the 500 largest companies in the United States. Along with the Dow Jones Industrial Average, it is one of the most popular indexes in the world. The larger companies, such as Google or Microsoft, have the biggest effect on the change in the index.

Dow Jones Industrial Average
Also known as the Dow, the DJIA is a collection of 30 hand-picked stocks that are chosen by a collection of investors to represent the economy. This index includes blue-chip companies like McDonald’s or Visa. It’s known as a price-weighted index, where the larger share prices change the index the most.

Nasdaq Composite
Not to be confused with the Nasdaq 100, the Nasdaq Composite includes every single stock that is listed on the Nasdaq stock exchange. This exchange is newer, meaning it has newer companies on it, excluding older ones such as General Electric and AT&T.


Russell 2000
The Russell 2000 represents small-cap stocks. As the name suggests, there are two thousand companies. Like the S&P and Nasdaq, the index is cap-weighted, where the larger companies affect it the most.

Next: What is market capitalization?