Used as a tool for investing in stocks, index mutual funds or exchange-trade funds (ETFs), a stock index is a hypothetical portfolio of securities representing a specific market, such as mid-, large- or small-cap. The term "cap" refers to market capitalization, which is calculated by multiplying a company's stock price by its total number of outstanding shares.
There is no single definition of a mid-cap stock. However, Standard & Poor's (S&P) stock indexes define mid-cap as a market capitalization of $300 million to $4 billion, large-cap as a market capitalization of over $4 billion and small-cap as a market capitalization of under $300 million. ETFs based on the S&P Mid-Cap Index include the SPDR S&P MidCap 400 ETF and the Vanguard S&P MidCap 400 ETF, for example.
The Russell Midcap uses approximately the 200th through 1000th largest firms in Russell Investments' own, broader-based Russell 2000 index. Similarly, the Wilshire US Mid-Cap Index uses stocks numbering 501 through 1000 in the Wilshire 5000 index. Russell and Wilshire also produce separate large-cap and small-cap indexes.
Investors interested in diversifying their portfolios beyond big stocks can use the mid- and small-cap indexes to help determine how small, medium and large companies are performing as a whole. An investor can also use an index as a benchmark for looking at performance of a specific stock in comparison to other stocks in the same class.
Other indexes track very large (mega-cap) and very small (micro-cap) stocks. Indexes can also be used for tracking securities based on other criteria aside from size. Indexes are available for foreign investments and the bonds market, for example.