What Is a Stock Index? How the S&P 500, Dow, and Nasdaq Are Built

A stock index is a single number that tracks the combined performance of a group of stocks, used as a shorthand for how a market or sector is doing overall rather than following any one company. When a news report says "the market was up today," it's almost always referring to the movement of one or more major indices, not every individual stock.

The S&P 500 tracks 500 of the largest publicly traded US companies, weighted by market capitalization — meaning larger companies have a proportionally bigger effect on the index's movement than smaller ones. It's widely considered one of the best single measures of the overall US stock market and US large-company economic health, precisely because it spans many companies across many industries rather than concentrating in one sector.

The Dow Jones Industrial Average (the "Dow") tracks just 30 large US companies and is calculated differently — it's price-weighted, meaning a stock with a higher share price moves the index more than a stock with a lower price, regardless of the company's total market value. This is a historical quirk of how the index was built over a century ago, and it's a meaningful reason the Dow can move differently than the S&P 500 on the same day even when tracking overlapping companies.

The Nasdaq Composite tracks essentially all companies listed on the Nasdaq exchange, which skews heavily toward technology companies — making it more sensitive to swings in the tech sector specifically than the broader S&P 500. Beyond these three, most countries have their own headline index (the FTSE 100 in the UK, the DAX in Germany, the Nikkei 225 in Japan), each built with its own specific rules for which companies are included and how they're weighted.