Indices are calculated by taking a representative sample of securities and aggregating their prices or values into a single number. This number can then be used to gauge market trends, compare the performance of different investments, or create investment products like index funds or ETFs. Common examples include the S&P 500, which tracks 500 of the largest U.S. companies, and the Dow Jones Industrial Average, which reflects the stock performance of 30 major U.S. corporations.
Index Example
For example, if an investor wants to assess how the U.S. stock market is performing, they might look at the S&P 500 index. If the index rises from 4,000 to 4,200 over a month, it indicates that the overall market is up by 5%, suggesting a positive trend in stock prices.