What Does a Stock Index Actually Measure?

You hear it every day. The FTSE 100 is up. The S&P 500 closed lower. Markets had a good day. But what does any of that actually mean, and should you trust it as a picture of what's really going on?

What a stock index actually is

A stock index is simply a basket of companies grouped together to give you a snapshot of how a market is performing. The FTSE 100 is the 100 largest companies listed on the London Stock Exchange. Think Shell, HSBC, Unilever, AstraZeneca. The S&P 500 is the 500 largest companies listed in the United States: Apple, Microsoft, Amazon and so on. When people talk about "the market" going up or down, they are almost always referring to one of these indices.

The idea is straightforward. Rather than tracking thousands of individual stocks, you track a representative sample and use that as a proxy for the overall health of the market.

The bit most people miss

Here is where it gets more interesting. An index does not treat every company equally. Most major indices are weighted by market capitalisation, which means the bigger the company, the more influence it has over the index. In the S&P 500, the top ten companies account for a significant chunk of the entire index's movement. Apple alone can move the needle.

What this means in practice is that the index going up does not mean all 500 companies went up. It might just mean the five or ten largest ones did. The other 490 could be flat or even falling, and you would never know from the headline number.

Why the index doesn't tell the whole story

This is why treating an index as a complete picture of the market can be misleading.

A strong FTSE 100 day might be driven entirely by a handful of energy companies reacting to oil prices, while retailers, house builders, and smaller businesses are having a difficult day. A rising S&P 500 might reflect strength in big tech while the rest of the market is quietly struggling.

The index gives you a direction. It does not give you depth.

What this means for your portfolio

If your portfolio looks nothing like the top ten companies in the FTSE 100 or S&P 500, and for most investors it won’t, then the index number tells you relatively little about how your specific holdings are doing. Your portfolio is personal. The index is an average. And averages, by definition, hide what is happening at the individual level.

This is one of the core reasons Tali exists. Rather than showing you a generic market number and leaving you to figure out what it means, Tali explains what is actually happening in the context of what you own. Because a market being up or down is only half the story, the part that matters is what it means for you.