The one-number idea
Imagine trying to answer “how did the US stock market do today?” by checking 500 companies one by one. An index does that work for you. It bundles a defined group of companies into a single value that moves with them together. When you hear “the S&P 500 was up 1%”, that is an index at work. A regulator-friendly definition: an index is simply a way of measuring the value of a section of the stock market.[1]
How companies are chosen and weighted
Every index follows a published rulebook set by its provider (S&P, MSCI, FTSE Russell and others). Two things define it: which companies are in, and how much each one counts. Most large indices are market-capitalisation weighted — a company's weight equals its total market value, so Apple counts far more than a small firm. A few use equal weighting or other rules.
| Index | Covers | Roughly |
|---|---|---|
| MSCI World | Large & mid companies, developed markets | ~1,400 companies, 23 countries |
| S&P 500 | Large US companies | 500 companies |
| Euro Stoxx 50 | Eurozone blue chips | 50 companies |
| MSCI Emerging Markets | Developing economies | ~1,200 companies, 24 countries |
| OMXS30 | Most-traded Swedish stocks | 30 companies |
Price return vs total return
The index level you see quoted on the news is usually the price return — it ignores dividends. But dividends are a large part of long-run equity returns, and a fund that reinvests them tracks the total return version of the index. When you compare funds or read our tools, make sure you are comparing total-return figures, otherwise you understate what investors actually earned.
Why indices matter to you
An index is the benchmark professional fund managers are measured against — and most of them lose. According to S&P Dow Jones Indices' long-running SPIVA research, the large majority of actively managed funds underperform their benchmark over 10- and 15-year periods, and very few that do well in one period stay ahead in the next.[2] That is the entire case for index investing: rather than betting on a manager or a stock, you track the whole group and capture its long-run growth at very low cost.
You can't buy an index directly
An index is just a number — there is nothing to purchase. To actually own it, you buy a fund that copies it, holding the same companies in the same proportions. For most people that means an ETF.
Common questions
Can I invest in an index directly?
No. An index is a measurement, not a product. You invest in it by buying an index fund or ETF that holds the same companies.
What is the difference between the S&P 500 and MSCI World?
The S&P 500 holds about 500 large US companies. MSCI World holds roughly 1,400 large and mid-sized companies across 23 developed countries, so it is more globally diversified but still excludes emerging markets.
Do indices include dividends?
The headline index level is usually a price return that excludes dividends. Funds tracking the total-return version reinvest dividends, which makes a big difference over the long run.