You have probably come across stock market index names such as FTSE 100, S&P 500, the Dow Jones, or DAX 30 in the news. Indices like these have increasingly become part of everyday language in the trading and investing spheres, and rightly so; their popularity is on the rise.
An index tracks and measures a particular compilation of related stocks and it’s used to evaluate the performance of a sector, a region, or a country’s economy. For example, major indices like the German Index DAX 30 measures the performance of the top 30 German companies while the NASDAQ 100 index measures the performance of a group of American companies mainly in the technology sector.
With thousands of stocks available on the various major exchanges worldwide, indices are an efficient way to reliably track and measure overall performance and market sentiment, but how do they work?