The stock market we know today is nothing like it used to be when the concept was born. Hundreds of years ago, the stock market started as a small institution created by agricultural traders and banks of Europe to manage and regulate commodity trading. Fast forward to the 21st century, it has transformed into a comprehensive global network of stock exchanges.

The modern stock market, also called the share or equity market, offers various financial instruments (securities) on dozens of exchanges worldwide – stocks, shares, bonds, mutual funds and others.

When a number of such securities are put together, it's called a stock index. In this article, we'll take a closer look at stock market indices, explain how they work and the benefits of index trading

What is a stock market index?

A stock index is a basket of various financial instruments. However, most indices that are available for public trading typically include only companies' shares. These companies have to be publicly listed on a stock exchange, meaning their shares can be bought, sold and owned by the public.

There are different ways of organising these companies into stock indices – they can be grouped by financial market, country, industry or another differentiator. This allows analysts to track and measure the performance of the category they belong to and calculate market performance. For example, if an index value of the US major companies is going up in value, it usually means that the country's economy is expanding.

What is an index ticker?

An index ticker, also called a symbol or code, is a combination of letters and numbers used for the index's easy identification and tracking. Just like each currency has a code in the forex market – EUR for the euro, USD for the US dollar and so on, indices also have their own code. For example, S&P 500 stands for The Standard and Poor's 500 index. The term ticker is not exclusive to stock indices and used in other markets, such as stocks, futures and ETFs, too.

Keep in mind that brokers usually use different tickers to distinguish instruments used to trade indices. For example, with ThinkMarkets, you can trade indices with CFDs, so to differentiate the actual S&P 500 index from a CFD contract on it, the latter has the SPX 500 ticker.

What are the most popular indices in the stock market?

The popularity of a stock index depends on where the companies within it originate. For example, with the US being the largest economy in the world, American stock indices make up over 50% of the value of the global stock market. It is no surprise that these indices are the most popular and the most traded in the world, with S&P 500, Nasdaq 100 and Dow Jones usually leading this list.

S&P 500 (SPX 500)

The S&P 500 is a stock market index that tracks the performance of the 500 largest companies in the US. It is considered the benchmark of the American economy because the aggregated value of the companies within it represents over two-thirds of the US stock market’s value.

Dow Jones Industrial Average (US 30)

The Dow Jones Industrial Average index is very similar to the S&P 500 but tracks only the 30 largest companies. Due to their similarity, these two stock indices are highly correlated and tend to move in the same direction.

Nasdaq 100 (NAS 100)

The Nasdaq 100 index consists of the 100 largest non-financial companies' stocks. The companies that make up this stock index represent various industries, but due to the dominance of major technology sector players, NAS 100 is tech-heavy.

Other popular indices usually track the performance of large economies, such as the total market index of the UK – FTSE 100 (UK 100), Japan – Nikkei 225 (JPN 225), Germany – DAX 40 (GER 40), and others.

Why is index trading popular?

Index trading attracts a fair share of retail traders looking for personal gain. Here is why it's so appealing to them:

Diversification

Due to their nature, indices provide traders with greater exposure than any other financial market, limiting risk at the same time, as they are less likely to be affected by a sharp move from a single stock.

Comfortable volatility levels and consistent trends

Broad diversification results in more consistent trends and much milder volatility that rarely sees enormous price jumps, which can be very appealing for risk-averse traders.

Reliability

The stock market is well established. It's been around for a couple of centuries and has had enough time to set clear rules and regulations. Stock exchanges around the world are managed by reputable and trustworthy institutions that would crack down on fraud or price manipulation.

How are indices made?

The list of companies that make up a specific stock index is not permanent. Every index has a set of criteria a company needs to meet to be included in a certain stock index. The requirements may vary from index to index, but market capitalisation and liquidity thresholds are usually among the most common ones. As market conditions change and economies evolve, some companies may fall out of an index while others may become a better fit for it.

The eligibility requirements also depend on the index's type. For example, indices that are weighted by company value may have very different prerequisites compared to indices weighted by stock prices. In our next article, Stock market indices: all the types you need to know, we explore different types of indices and explain how they can be calculated.

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