When the news says "markets were up today," they mean an index was up. But an index is not "the market" — it's a specific, curated list of stocks, calculated in a specific way, representing a specific slice. Understanding what each index actually tracks changes how you interpret financial news entirely.
A stock market index is a number that tracks the combined performance of a selected group of stocks. It goes up when those stocks go up, down when they fall. The exact calculation varies — some weight companies by market cap, some by share price — but the point is a single number representing a market's direction.
Indices don't exist to be invested in directly. They're measurements. But financial products called index funds and ETFs replicate their performance — so when people say "I invest in the S&P 500," they mean they hold a fund that tracks it.
| Index | What it tracks | Weighting |
|---|---|---|
| S&P 500 | 500 largest US companies — Apple, Microsoft, Nvidia, Amazon etc. | Market cap |
| FTSE 100 | 100 largest companies on the London Stock Exchange | Market cap |
| NASDAQ Composite | All ~3,700 stocks on NASDAQ — heavily tech | Market cap |
| Dow Jones (DJIA) | 30 large US "blue chip" companies, hand-picked | Price weighted |
| MSCI World | ~1,500 companies across 23 developed countries | Market cap |
| Nikkei 225 | 225 major Tokyo Stock Exchange companies | Price weighted |
Most major indices weight companies by market capitalisation. A company worth £100 billion gets 10x the weighting of one worth £10 billion. In the S&P 500, the top 10 companies — Apple, Microsoft, Nvidia, Amazon and a few others — make up roughly 30–35% of the entire index. When Apple has a bad week, the "S&P 500" has a bad week, even if 400 of the other companies were fine.
The concentration risk people ignore: if you own an S&P 500 index fund thinking you're diversified across 500 companies, you're actually heavily concentrated in US tech. That's not necessarily bad — US tech has driven enormous returns — but it's worth knowing what you actually own.
The FTSE 100 is often described as "the UK stock market" but that's misleading. Many of its biggest companies earn most of their revenue internationally — Shell, BP, HSBC, AstraZeneca, Unilever. When the FTSE 100 rises, it doesn't necessarily mean the UK economy is doing well. The FTSE 250 — the next 250 largest UK-listed companies — is a much better proxy for the UK domestic economy.
Indices are maintained by committees or rules-based systems that review membership periodically. Companies drop out when their market cap falls below the threshold, or they're acquired. Each time a company enters a popular index like the S&P 500, index funds are forced to buy its shares — creating predictable buying pressure before the funds even move.
The most useful index for a UK teenager: MSCI World. It tracks 1,500 companies across 23 countries. One fund, genuinely global exposure. Most low-cost ISA-eligible ETFs track either MSCI World or S&P 500. Both are excellent. Global is more diversified; US-only has outperformed historically but carries concentration risk.
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