Index

An index is a rule-based list of assets whose combined value is tracked as a single number. The rules decide everything: which assets qualify, how each is weighted — by market value, by price or equally — and when the list is refreshed. The published level is the weighted result of the members' prices, scaled from an arbitrary starting value. An index is a measuring stick, not a product; it cannot itself be bought. Funds built to track it are the products.

A worked example

Suppose a hypothetical index holds three shares in equal weight and starts at a level of 100. Over a period the shares return plus 10 per cent, minus 2 per cent and plus 4 per cent. The equal-weighted average is 10 minus 2 plus 4, divided by 3, which is 4 per cent, so the index rises from 100 to 104. Different weighting rules applied to the same three shares would give a different level.

An index reports what its own rules measured, nothing more. Two indices with different rules can describe the same market differently, and the level ignores dealing costs, taxes and tracking differences — so it is not the return any investor actually receives.