An index measures how a specific part of the market is performing by combining multiple stocks into one reference number. Instead of tracking a single company, you track the average movement of many.
It’s a way to see the market’s direction without picking individual winners. Investors often use indexes as a baseline to compare performance or to gain broad exposure without stock selection.
Indexes define what “the market” is doing. They help investors understand whether gains or losses come from skill or from general market movement.
They also play a key role in passive investing, where exposure is gained through products like ETFs instead of individual stocks. This ties directly into diversification, risk, and long-term portfolio construction.
Indexes typically differ by:
- Market coverage like broad, sector, or regional
- Weighting method such as market-cap or equal-weighted
- Use case like benchmarks or investable products
Performance is usually quoted as percentage change over time.
A common mistake is treating all indexes as interchangeable. Different indexes track different market segments and risk profiles.
Another error is ignoring concentration risk in market-cap weighted indexes. Large companies can dominate performance, increasing exposure to volatility even in diversified-looking setups.
On Stoxcraft, indexes are referenced in market overviews, Academy content explaining market cycles, and comparisons between active strategies and index-based approaches.
They’re also used as benchmarks when discussing portfolio performance and long-term investing behavior.