foxex: What is a 'Market Index'?

Monday, March 9, 2020

What is a 'Market Index'?

Term of the Day | Words to Know

A market index is a hypothetical portfolio of investment holdings which represents a segment of the financial market. The calculation of the index value comes from the prices of the underlying holdings. Some indices have values based on market-cap weighting, revenue-weighting, float-weighting, and fundamental-weighting. Weighting is a method of adjusting the individual impact of items in an index.

Investors follow different market indexes to gauge market movements. The three most popular stock indexes for tracking the performance of the U.S. market are the Dow Jones, S&P 500 and Nasdaq Composite. In the bond market, Bloomberg Barclays is a leading provider of market indexes with the U.S. Aggregate Bond Market Index serving as one of the most popular proxies for U.S. bonds. Investors cannot invest directly in an index, so these portfolios are used broadly as benchmarks or for developing index funds.

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Related Definitions

Expense Ratio

The expense ratio (ER), also sometimes known as the management expense ratio (MER), measures how much of a fund's assets are used for administrative and other operating expenses.

Benchmark

A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured.

Index Fund

An index fund is a portfolio of stocks or bonds that is designed to mimic the performance of a market index. These funds frequently make up the core holdings of retirement portfolios and offer lower expense ratios than actively managed funds.

Capitalization-Weighted Index

A capitalization-weighted index is a type of market index with individual components that are weighted according to their total market capitalization.