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system
why are index funds called index funds?
user
because they track an index. edited: the definition of the word in this case meaning "something used or serving to point out; a sign, token, or indication" from meaning  #3 i presume therefore you are asking what an index is? there are many variations of what makes up an index but in short it is a representation of some part of a market. an extremely simplistic calculation would be to take a basket of stocks, and sum their prices.  if one stock moves up a dollar, and one moves down a dollar, the index has effectively not changed, as it is presumed that the loss in one is offset by the gain in the other.
assistant