Index

A stock index is a calculated number that tracks the combined performance of a defined basket of stocks, serving as the market's scoreboard. The S&P 500 tracks roughly 500 large US companies; the Nasdaq-100 tracks the biggest non-financial Nasdaq names; the Dow tracks 30 blue chips.

Weighting method changes everything. The S&P 500 is float-adjusted market-cap weighted, so a $3 trillion company moves the index hundreds of times more than a $10 billion one — the top 10 names have recently made up over 30% of the index. The Dow is price-weighted, an artifact of 1896 arithmetic: a $500 stock carries ten times the weight of a $50 stock regardless of company size, with a divisor near 0.15 turning summed prices into the quoted level.

Indexes are not directly tradable, but trillions of dollars track them through index funds, ETFs, and futures, which means index inclusion or deletion forces real buying and selling in the underlying stocks.