Index

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What is an 'Index'

An index is a statistical measure of change in an economy or a securities market. In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology and is usually expressed in terms of a change from a base value. Thus, the percentage change is more important than the actual numeric value.

Stock and bond market indexes are used to construct index mutual funds and exchange-traded funds (ETFs) whose portfolios mirror the components of the index.

BREAKING DOWN 'Index'

The Standard & Poor's 500 is one of the world's best known indexes, and is the most commonly used benchmark for the stock market. Other prominent indexes include the DJ Wilshire 5000 (total stock market), the MSCI EAFE (foreign stocks in Europe, Australasia, Far East) and the Lehman Brothers Aggregate Bond Index (total bond market).

Because, technically, you can't actually invest in an index, index mutual funds and exchange-traded funds (based on indexes) allow investors to invest in securities representing broad market segments and/or the total market.

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RELATED FAQS
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    First, let's review the definition of an index. An index is essentially an imaginary portfolio of securities representing ... Read Answer >>
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    Learn about the difference between an index fund and an exchange-traded fund and how index fund investing compares to value ... Read Answer >>
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    To answer this question, we should first define exactly what an index fund is. An index fund is a mutual fund, or a basket ... Read Answer >>
  4. Why do index funds tend to have low expense ratios?

    Understand what an index fund is and why the nature of index funds causes them to have lower expense ratios than more actively ... Read Answer >>
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