Index

The output of a published calculation over a defined list of listed companies. A rule decides which companies are on the list and how much each one counts, and the result is republished every few seconds while those shares trade. The level is in points, a ratio to what the same calculation produced on a base date, scaled by a divisor. An index is a rule, not an asset.

The rule is written down and administered by an index provider, and it covers more than the list. It states the weighting method, the review dates on which constituents are added and removed, the treatment of a company that is taken over or delisted, and the adjustments made to the divisor so that a corporate action changes nobody's share of the index and leaves the published level continuous. The same machinery is applied to lists that are not companies at all, so bond, commodity and currency indices exist and are built on the identical principle of a rule over a defined list.

What most often needs saying is that an index cannot be bought. Every instrument described as tracking one is a separate object with its own price, its own costs and its own hours: a fund holding the constituents, a listed future, or a contract settled against the level. A second distinction is between a price index, which counts only the movement of the constituent prices, and a total return index, which assumes dividends are reinvested. Over a long period the two diverge substantially, and headline levels are almost always the price version.