A stock index or stock market index is a measurement of a section of the stock market. From among the stocks listed on the exchange, some similar stocks are selected and grouped together to form an index.
The values of the grouped stocks are used to calculate the value of the index (typically a weighted average). Any change in the price of the stocks leads to a change in the index value. An index is thus indicative of the changes in the market and used by investors and financial managers to describe the market and to compare the return on specific investments.
Two of the primary criteria of an index are that it is invest-able and transparent. Many mutual funds and Exchange-traded funds attempt to “track” an index fund with varying degrees of success. The difference between an index fund’s performance and the index is called tracking error.
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