An index is a list of shares, bonds or other securities. The constituents of the list are all part of a specific asset class (for example, shares or bonds).
They all comply with certain criteria, which gives the index unique characteristics and an overall purpose. In the case of an equities (shares) index, the criteria can be the size of a company, where it is based or the industry in which it operates.
For example, the FTSE 100 is a list of the 100 largest companies listed on the London Stock Exchange.
In the investment management industry, the majority of funds use an index as a benchmark. In a passive fund, the manager buys shares in companies listed in the index and aims to match the performance of the index. However, in an active fund, the manager uses the index as a guide for what to buy but aims to deliver returns that exceed those of the index.
An index can also be used as an economic indicator, providing a snapshot of a economy’s performance. For example, the FTSE 100 is often used to show the performance of the wider UK economy, as it is made up of the country’s biggest companies. Similarly, the S&P 500 index is said to indicate US economic performance, as it is a list of the 500 largest companies listed on the New York Stock Exchange.