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Market Structure

Index

A measurement of a section of the stock market. The S&P 500, Nasdaq Composite, and Dow Jones are the three most watched indexes.

What is a Stock Market Index?

An index is a number that measures the performance of a group of stocks. It gives you a quick way to see how "the market" is doing without looking at every individual stock. When someone says "the market was up 1% today," they are referring to an index.

Major US indexes

  • S&P 500: 500 of the largest US companies, weighted by market cap. This is the primary benchmark for the US stock market. SPY is the ETF that tracks it
  • Nasdaq Composite: all stocks listed on the Nasdaq exchange, heavily weighted toward technology. QQQ tracks the top 100 Nasdaq stocks
  • Dow Jones Industrial Average (DJIA): 30 large blue-chip companies. The oldest and most widely quoted index, though many traders consider it less representative than the S&P 500. DIA is the ETF that tracks it
  • Russell 2000: 2,000 small-cap US companies. Considered a gauge of the broader domestic economy. IWM is the ETF that tracks it

Why traders watch indexes

  • Market direction: if the S&P 500 is trending down, most individual stocks will struggle to go up. Trading with the index trend increases your odds
  • Relative strength: comparing a stock to its index shows whether it is outperforming or underperforming. A stock going up while the S&P drops is showing relative strength
  • Sector rotation: watching sector indexes (XLF for financials, XLE for energy, XLK for tech) reveals where money is flowing
You cannot buy an index directly. You buy an ETF that tracks it. When you buy SPY, you are buying a fund that holds all 500 stocks in the S&P 500 in proportion to their market cap.

Related Terms

ETF (Exchange-Traded Fund)

A fund that trades on an exchange like a stock, holding a basket of assets such as stocks, bonds, or commodities. SPY and QQQ are ETFs.

QQQ

The Invesco QQQ ETF, tracking the 100 largest non-financial companies on the Nasdaq. Heavily weighted toward tech giants like Apple, Microsoft, Nvidia, and Amazon.

S&P 500

An index of the 500 largest publicly traded US companies, weighted by market cap. The most widely used benchmark for overall US stock market performance.

SPY

The SPDR S&P 500 ETF. The most traded security in the world, tracking the 500 largest US companies. When traders say "the market," they usually mean SPY.