Understanding Market Indices: Benchmarks Behind “The Market”

September 10, 2025

When you hear people say “the stock market went up today” or “the markets are down,” they’re often not talking about every single stock in existence. Instead, they’re usually referring to a market index—a tool that tracks the performance of a specific group of investments.

The S&P 500 and the Dow Jones Industrial Average are two of the most famous examples, and their movements are what you’ll often see covered in financial news. But what exactly is a market index, and why does it matter to investors? Let’s take a closer look.

What Is a Market Index?

A market index measures the performance of a collection of securities, such as stocks, bonds, commodities, or even currencies. By grouping investments together, an index provides a snapshot of how a particular slice of the financial market is performing.

Indexes are useful for comparing current price levels to past ones, allowing investors to measure growth (or decline) over time. Some indices focus narrowly—like small-cap companies or a single industry sector—while others provide a broader picture of the market.

Can You Invest in an Index?

Strictly speaking, you can’t buy an index itself. An index is just a measurement.

However, you can invest in index funds or exchange-traded funds (ETFs) that are designed to mirror the performance of a particular index. For example, an S&P 500 index fund invests in the 500 companies included in the S&P 500, giving investors exposure to a wide slice of the U.S. economy in a single investment.

Why Do Different Indices Have Different Prices?

If you’ve ever compared indices, you may have noticed that their quoted values vary dramatically. The Dow Jones Industrial Average, for instance, sits in the tens of thousands, while the S&P 500 is much lower—even though the S&P tracks far more companies.

That difference comes down to how the indices are calculated:

●     Dow Jones Industrial Average (DJIA): A price-weighted index. The value is determined by adding up the prices of its 30 stocks and dividing by a set number. Higher-priced stocks have a bigger impact.

●     S&P 500: A market capitalization-weighted index. Each company’s size (share price multiplied by total shares outstanding) determines its influence on the index. Larger companies carry more weight.

Because of these differences, two indices may tell slightly different stories about market performance.

Examples of Major Market Indices

Here are a few of the most widely followed indices in the U.S.:

●     Dow Jones Industrial Average (DJIA): Tracks 30 of the most well-established American companies, such as Apple, Coca-Cola, and Walmart. While its small size makes it less comprehensive, it remains one of the most recognized indicators in the media.

●     S&P 500: Tracks 500 of the largest publicly traded U.S. companies across many industries. Considered by many to be the best barometer of the overall U.S. stock market.

●     NASDAQ Composite: Includes thousands of companies listed on the Nasdaq exchange, with a heavy tilt toward technology stocks.

●     Russell 3000: Represents nearly the entire U.S. equity market by tracking 3,000 of the country’s largest publicly held companies. While not as widely discussed in the news, it offers a broad view of market performance.

Why Market Indices Matter

Market indices aren’t just numbers scrolling across a ticker. They are essential tools for investors, financial professionals, and economists alike. Indices help track performance, set benchmarks for portfolios, and provide perspective on market trends.

For investors, understanding indices—and how they’re built—can offer valuable context for making informed decisions about diversification and long-term strategy.

Sources:

https://www.nerdwallet.com/article/investing/index

Disclosure:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.