Index

An index is a hypothetical basket of securities or economic variables designed to track changes over time. The most common type of index tends to be the stock index such as the Dow Jones Industrial Average and the S&P 500 Index. Each index has its own methodology for calculating the effect of individual index components. The Dow Jones, for example, treats its 30 stocks identically; a rise of $1 in the stock of a $300B company affects the index in exactly the same way as a rise of $1 in the stock of a $30M company stock. Other indexes make varying degrees of adjustments to account for the differences in company size. Indexes can track market characteristics instead of market values. For example, the Volatility Index (VIX) measures options premiums to determine the market's expectation for future volatility. There are also economic indices that track measures of economic health, such as the Consumer Price Index (CPI).