Začínáme s investováním
What Is a Stock Index and Why Investors Build on It
Key takeaways
- A stock index is a basket of selected companies that measures market performance with a single number.
- Most indices weight companies by size (market capitalisation), so large companies have more influence.
- An index serves as a benchmark — a measure against which you compare results.
- An index ETF lets you buy the entire index at once, cheaply, without picking stocks.
- Investing "on an index" means owning the whole market rather than betting on individuals.
A stock index is a basket of selected companies whose combined performance you follow with a single number. When you hear "the market rose one percent today", they are usually talking about the movement of some index. It is the market's thermometer — and also the foundation on which all passive investing rests.
What an index is for
An index plays two roles. First, it is a measure (benchmark): it tells you whether the market did well and how your portfolio compares to it. Second, it is a guide to what to buy: funds exist that track the index precisely, so you can own the entire basket of companies in a single purchase.
How an index is constructed
An index is assembled by its administrator according to clear rules — which companies to include (size, liquidity, domicile, sector) and what weight to give them. Example: the S&P 500 comprises roughly 500 of the largest US companies and covers around 80% of the US market's value. The composition is revised regularly — companies that have grown are added; those that have declined are removed.
How an index is weighted
The most common method is market-capitalisation weighting — the larger the company, the larger its share in the index. The consequences:
- A few of the largest companies (today mainly technology giants) carry a large weight and move the index the most.
- The index automatically "lets winners run" — growing companies gain a larger share.
- The downside is concentration: when the top of the index is narrow, you depend heavily on a handful of firms.
There is also equal weighting (every company the same) or dividend weighting — each behaves somewhat differently.
How to buy an index
You cannot buy the index itself — it is just a list and a number. You buy it through an index ETF that faithfully tracks it. That gives you a share in all the companies in the index at their respective weights, for an annual fee often in the tenths of a percent. Specific funds covering the most well-known indices are in the ETF overview.
What to take away
Investing "on an index" means stopping the bet on individuals and instead owning the entire market. It is boring, cheap, and historically very effective — that is why it is the cornerstone of most long-term investors' strategy. We cover how each index has behaved and how many companies it contains in the Blog section.
FAQ
What exactly is a stock index?
A basket of selected companies whose combined performance is measured by a single number. It serves as a market measure (benchmark) and a guide to what to buy — through an index ETF that faithfully tracks that basket of companies.
What does it mean that an index is market-cap weighted?
That the larger the company (by market value), the larger its share in the index and the more it influences the index's movement. Large companies thus drive the index the most, which brings both strength and the risk of concentration at the top.
Can I buy an index directly?
Not the index itself — it is just a list and a number. You buy it through an index ETF that tracks the index. That gives you a share in all the companies in the index at their respective weights for a low annual fee.
Why do investors build on indices?
Because an index gives instant diversification across hundreds of companies, minimal costs, and requires no stock-picking. Instead of betting on individuals you own the entire market, which historically grows over the long term — that historically beats most active strategies.