Equity Index (Stock Market Index)

Definition

The term equity index refers to a sample of equities used to measure the performance of a sector of equities. An equity index is a tool used by investors to understand how an individual equity is performing relative to its peers.

Explanation

Also referred to as a stock market index, an equity index is a sample of equities, or common stocks, which are used as a benchmark when comparing the performance of a smaller set of equities or an individual stock. Mutual funds and exchange traded funds (ETFs) oftentimes attempt to replicate the performance of an index. This allows investors to achieve returns similar to the market index.

Broad market measures include the S&P 500, the Nikkei 225, the FTSE 100 and the NASDAQ Composite Index. While the Dow Jones Industrial Average was at one time considered an indicator of the overall market's performance, other indices such as the S&P 500 are deemed more indicative.

In addition to broad measures of market performance, an equity index can measure the performance of a smaller sector of stocks. For example, the Dow Jones Utilities Index and the Dow Jones Transportation Index provide a better measure of companies competing in these sectors. Finally, the Wilshire 5000 Index is considered a total market index since it includes nearly every publicly-traded company in the United States including those traded on both the NASDAQ and New York Stock Exchange.

Related Terms

equity, index weighting, capitalization weight, price weight index, fundamental weight index