what is an index 
a financial index produces a numeric score based on inputs such as a variety of asset prices it can be used to track the performance of a group of assets in a standardized way indexes typically measure the performance of a basket of securities intended to replicate a certain area of the market these could be constructed as a broad based index that captures the entire market such as the standard poor s 500 index or dow jones industrial average djia or more specialized such as indexes that track a particular industry or segment such as the russell 2000 index which tracks only small cap stocks investopedia mira norianunderstanding indexesindexes are also created to measure other financial or economic data such as interest rates inflation or manufacturing output indexes often serve as benchmarks against which to evaluate the performance of a portfolio s returns one popular investment strategy known as indexing is to try to replicate such an index in a passive manner rather than trying to outperform it indexes in finance are typically used to track a statistical measure of change in various security prices in finance it typically refers to a statistical measure of change in a securities market in the case of financial markets stock and bond market indexes consist of a hypothetical portfolio of securities representing a particular market or a segment of it you cannot invest directly in an index the s p 500 index and the bloomberg us aggregate bond index are common benchmarks for the u s stock and bond markets respectively in reference to mortgages it refers to a benchmark interest rate created by a third party each index related to the stock and bond markets has its own calculation methodology in most cases the relative change of an index is more important than the actual numeric value representing the index for example if the ftse 100 index is at 6 670 40 that number tells investors the index is nearly seven times its base level of 1 000 however to assess how the index has changed from the previous day investors must look at the amount the index has fallen often expressed as a percentage index investingindexes are also often used as benchmarks against which to measure the performance of mutual funds and exchange traded funds etfs for instance many mutual funds compare their returns to the return in the s p 500 index to give investors a sense of how much more or less the managers are earning on their money than they would make in an index fund indexing is a form of passive fund management instead of a fund portfolio manager actively stock picking and market timing that is choosing securities to invest in and strategizing when to buy and sell them the fund manager builds a portfolio wherein the holdings mirror the securities of a particular index the idea is that by mimicking the profile of the index the stock market as a whole or a broad segment of it the fund will match its performance as well since you cannot invest directly in an index index funds are created to track their performance these funds incorporate securities that closely mimic those found in an index thereby allowing an investor to bet on its performance for a fee an example of a popular index fund is the vanguard s p 500 etf voo which closely mirrors the s p 500 index 