Stocks · Beginner · 5 min

What is an index? S&P 500, Nasdaq, DAX, MSCI World

You can explain what a stock index measures, how the best-known indices are built, and why you cannot buy an index directly.

One number, many stocks

"The market rose 1% today." You hear it in every news report. But there is no single market. What people mean is usually an index: one number that sums up how a group of stocks moved.

Indices are everywhere, from news tickers to fund names. They look similar, but each one is built by its own rules, and those rules decide what it really shows. This lesson introduces the four you will hear about most often.

Rules decide what's inside

A stock index measures the combined price movement of a group of shares, chosen and weighted by published rules. An index provider calculates it, changes its members when the rules require, and publishes the level, often every few seconds.

Many indices count only the free float: the shares that are actually available to trade, without large blocks held by founders, governments or other companies.

The four best-known names:

S&P 500: about 500 leading US companies, weighted by free-float market value. A committee at S&P Dow Jones Indices decides which companies are included, following published criteria. The version quoted in the news is a price index.
Nasdaq-100: 100 of the largest non-financial companies listed on the Nasdaq exchange, with caps that limit how heavy a single company can become.
DAX: the 40 largest companies on the Frankfurt Stock Exchange's regulated market that meet minimum quality and profitability requirements, with a cap of 15% per company. Its headline version is a total return index, which includes reinvested dividends.
MSCI World: large and mid-sized companies from 23 developed countries, covering about 85% of the free-float market value in each country. Despite the name, it contains no emerging markets and no small companies.

You cannot buy an index itself. It is a calculation. Index funds and ETFs buy the shares in the index to track it as closely as possible, which is the topic of the next rubric.

In or out by rule

A fictional company grows quickly and now meets an index's criteria. At the next review, the provider announces it will join.

On the effective date, funds tracking the index have to buy its shares, at whatever price is available.
Another company that has shrunk leaves the index, and the same funds must sell it.

Nothing changed in either business on that day. The rules changed which shares the index holds. Investors who know the dates and rules understand why prices can move around index changes.

Common mistakes

"The MSCI World is the whole world." It leaves out emerging markets and small caps.
Comparing a price index with a total return index. The second includes dividends and looks stronger over time.
Assuming an index is diversified enough. A few very large companies can dominate a market-value weighted index.
Treating index level as price. A DAX at 20,000 is not more expensive than an index at 5,000. Levels are not comparable.

The takeaway

An index measures a group of stocks by fixed rules. Each one is built differently, so check what it contains and how before you compare.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the index whose headline version includes reinvested dividends.

Tap the chart.

The DAX is one of the few major country indices whose best-known version is a total return index.
2What does the MSCI World Index cover?

MSCI World covers about 85% of the free-float market value in each of 23 developed markets. Emerging markets and small caps are not included.
3Which companies does the Nasdaq-100 track?

Nasdaq describes the Nasdaq-100 as 100 of the largest non-financial companies listed on its exchange.
4Can you buy an index directly?

An index is a calculation, not a product. Index funds and ETFs buy the shares to track it.

of 4 correct.