An index (plural: indices) is a portfolio including stocks that are traded on the same economy or securities market. All indices, such as NASDAQ or the Dow Jones Industrial Average, serve to track the performance of selected influential companies in order to evaluate and predict economic trends. This is an easy way to measure the value of a specific section of the stock market.
Indices have many different classes. A global index, as its name suggests, includes influential companies regardless of where they are located. Likewise, a national index evaluates the performance of a specific nation’s stock market. National indices can give us an idea of the state of that nation’s economy.
You also have indices that evaluate specific sectors’ performance in the market. An example would be an index of pharmaceutical or biotech companies. Other types of indices track companies based on their size, management type and more.
Some indices also have many variations in which stock performances are classified differently. Standard and Poor’s (S&P) serves as an extreme example with 500 multiple versions. Such indices can differ based on a number of factors, including how their components are weighted and how dividends are divided.