Index definition

An index is a method of tracking how a group of assets are performing in a standardised way. This can include securities, derivatives, or other financial instruments. Indices can be viewed as benchmarks that help measure the performance of specific asset classes, market sectors, or any group of assets with shared characteristics. As they are indicators, indices have no physical value in and of themselves.

This means you cannot directly invest in an index. Instead, you can speculate on the price movement of indices through CFDs, futures, and funds. These derivatives closely mimic assets tracked in specific indices, thereby allowing investors to speculate on their performance by proxy.

Why indices are important

Indices are usually used as yardsticks or benchmark measures. For instance, large financial institutions and individual investors benchmark their investments to indices in order to determine whether they are outperforming or underperforming in the markets they are investing in.

However, it is important to choose the right benchmark. It would not make sense to compare the performance of a mutual fund that mainly invests in mid-sized companies to the performance of index-tracking startups or small-sized companies.

Types of indices

Indices vary and can fit nearly every corner of the market. Some popular index types include:

Broad Market Indices: These indices typically track a major asset class or large segments of the market.

Sector Indices: These indices are typically industry-based, such as healthcare of technology. They can also be narrowed down, allowing investors to not only gain exposure to sectors on a broad level but also to specific companies.

Strategy and Thematic Indices: These indices are designed to mimic a specific investment strategy or capture a specialised segment of the market. They often include, but are not limited to, market niches such as infrastructure, biotech, and clean energy.

Commodity Indices: These indices stand out from fixed-income indices and equity indices as they track real, physical assets. The price of these assets tends to be driven solely by global supply and demand. Commodity indices are typically considered important when measuring the inflation risk when allocating assets.

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See related entries from our knowledge base:

Index market basics

How to trade indices?