A market index is a statistical measure that represents a segment of the stock market. The S&P 500 tracks 500 large US companies. The Dow Jones Industrial Average tracks 30. The Nasdaq Composite tracks thousands of stocks listed on that exchange. The FTSE 100 covers the largest companies on the London Stock Exchange. Each index has its own rules for inclusion and weighting.

Indices serve several purposes. They provide a benchmark for performance. A fund manager who returns 8 percent in a year looks good if the index returned 5 percent and bad if it returned 12 percent. Indices also underlie index funds and ETFs, which let investors buy the whole market in one trade. They are used in derivatives, where futures and options track index values. And they serve as economic indicators, reflecting investor sentiment.

Weighting methods vary. Market-cap weighted indices give larger companies more influence. Price-weighted indices, like the Dow, give higher-priced stocks more weight. Equal-weighted indices treat every company the same. The choice affects performance and risk. A market-cap index is dominated by its largest members. An equal-weighted index spreads exposure more evenly. Neither is inherently better. They measure different things.

Common indices

• S&P 500
• Dow Jones Industrial Average
• Nasdaq Composite
• FTSE 100
• Nikkei 225