A Short Guide to Market Indexes and their Purpose


If you’re into investing and you follow news every day, you would be familiar market indexes. You encounter these indexes every day: when you read the news, watch the TV, listen to the radio, and surf the net.

a market index's name on tiled lighting

For one, we’re sure you’ve heard about the NYSE, NASDAQ, FTSE, and others. These names pop up every day when news anchors and news websites give updates about the market.

However, not everybody is aware of the real functions of these exchanges. Most of the time, they only know that these indexes are going up or going down.

In this article, we’ll give you a quick introduction to what market indexes are and what purposes they serve.

Market Indexes: What are they?

Market indexes serve as statistical indicators. They are made to make it easier for people to compare the performance of a pool of securities. And such pool of securities can stand for an entire market or a specific part of the market like banks, oil, and others.

The index doesn’t have to include all the companies found in the market. Instead, the index only tracks a handful of companies that broadly represent the performance of the whole market, which can be gauged through their performance.

The Purposes of Market Indexes

Indexes serve many purposes. Here are some of the most important things that indexes provide market participants.


This is perhaps the biggest purpose that indexes serve. They are used to track or monitor the movements of the stock market, whether it’s going up, down, or sideways. All movements are anchored on the same base year and base value.

And because of that, you can easily compare the movements much easily. In fact, that’s the reason why indexes have become the most common way of tracking the movement of stock prices around the world.Using them this way helps a lot when it comes to technical analysis.

However, the movement in one index cannot be definitively compared to the movement tracked by another index. Therefore, there’s no such thing as an inter-index comparison.


Indexes also tell investors something about the stock’s behavior in comparison to the overall market performance. This paves the way for the easier benchmarking of a stock’s performance. You have to know both the growth of the stock and the growth in the relative index if you want to know whether the stock has outperformed others.

If the stock grew 20 percent, and then the index grew 25 percent, it cannot be said to have outperformed the market. Instead, it would be tagged as a weak performance.

Risk Gauging

The value that you get from the indexes is a crucial part of determining the riskiness of a stock. And a stock can be riskier or less risky in comparison to other stocks in the market.

You can gather the data that can be compared to the risk of the stock along with the indexes. The data you get can then be converted into “beta,” which is a universal statistical measure of riskiness.


The indexes also served as the basis from which derivative contracts are drawn. You can’t manipulate index movements, and that means derivative traders can base the contracts on these indexes.


You may think that you know what market indexes are. However, they can be more complex than you think. For now, the most important thing you have to keep in mind is that indexes can be used various ways to help you understand the market deeper and better.

FSMSmart is here to provide you with the latest news updates about market trends. Never miss out on news regarding forex, commodities, consumer, financial, and technology here in FSMSmart!