What Is A Stock Index?
A stock index or stock market index measures the value of a section of the stock market, typically the higher performing stocks.
Indices are a tool to describe the market and compare the return on specific investments. Indices can be global, national, regional, sector based or exchange based, examples of these are the MSCI World or the S&P Global 100 (global), the American S&P 500, the Japanese Nikkei 225, and the British FTSE 100, (national), the Developed Europe Index or the FTSE Developed Asia Pacific Index (regional), the NASDAQ-100 or the NYSE US 100, or the Euronext 100 or OMX Nordic 40 (exchanges).
Some indices, such as the S&P 500, have multiple versions which measure different components or performance indicators, this means the index is weighted. For example, there are three versions of the S&P 500 index:
Price return, which only considers the price of the components
Total return, which accounts for dividend reinvestment
Net total return, which accounts for dividend reinvestment after the deduction of a withholding tax.
Investment funds such as mutual funds and exchange traded funds attempt to ‘track’ the index which means they benchmark their performance against the index. However due to fees, taxes and other factors there can be a difference between the index funds performance and the index itself which is commonly referred to as a tracking error or active risk.
Tracking errors can be more prevalent with ‘actively managed’ fund as they often deviate slightly from the index in order to generate ‘active returns’. A portfolio that has an active manager can either outperform or underperform in relation to the index.
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.
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