What is the Index in Index Funds anyway?

I'm a big fan of low cost index funds and ETFs. They outperform the vast majority of actively managed funds and have allowed the everyday investor simple, convenient cost effective access to invest in all markets the world over.

But have you ever wondered about the underlying indices these funds are based on? and what is a Stock market index anyway?

Stock market indices are benchmarks that track the performance of a group of stocks — typically representing a country, sector, or investment theme.

Stock market indexes are designed to accurately measure the performance of specific segments of the global equity market, often categorized by geography (developed vs. emerging markets) or market capitalization.

The inidividual stocks/shares within an index are usually employ a Free Float-Adjusted Market Capitalization Weighting.

This methodology means that the weight, or influence, of a company within the index is determined by its total market value, but only considering the shares that are readily available for public trading (the "free float").

Market Capitalization (Market Cap)

The starting point is a company's market capitalization, which is calculated as:

This is the most common way to weight an index, giving larger companies more influence over the index's performance.

Here are some of the major stock market indices from firms such as Morgan Stanley Capital International (MSCI) and Standard & Poor (S&P)

🌎 Global / Broad Market Indices

These cover large portions of the global stock market:

• MSCI World Index – Tracks large and mid-cap stocks across 23 developed countries.
• MSCI Emerging Markets Index – Tracks stocks from emerging markets like China, India, Brazil, and South Africa.
• FTSE All-World Index – Covers both developed and emerging markets.
• S&P Global 100 – Includes 100 multinational blue-chip companies worldwide.

🇺🇸 United States

The U.S. has some of the most influential indices globally:

• S&P 500 – 500 of the largest U.S. companies (widely used as the main market benchmark).
• Dow Jones Industrial Average (DJIA) – 30 major blue-chip companies (price-weighted).
• NASDAQ Composite – Over 3,000 stocks, heavily weighted toward tech companies.
• Russell 2000 – Focuses on smaller U.S. companies (small-cap index).

🇬🇧 United Kingdom

• FTSE 100 – 100 largest companies on the London Stock Exchange.
• FTSE 250 – Mid-sized UK companies.
• FTSE All-Share – Broad measure covering almost all UK-listed stocks.

🇪🇺 Europe

• DAX (Germany) – 40 largest companies listed in Frankfurt.
• CAC 40 (France) – 40 largest companies on the Paris Stock Exchange.
• Euro Stoxx 50 – 50 leading companies from the Eurozone.
• IBEX 35 (Spain) – 35 largest Spanish companies.

🇯🇵 Asia – Japan

• Nikkei 225 – 225 leading Japanese companies (price-weighted).
• TOPIX – All companies listed in the First Section of the Tokyo Stock Exchange (broader measure).

🇨🇳 China

• Shanghai Composite – All stocks on the Shanghai Stock Exchange.
• Hang Seng Index (Hong Kong) – 50 major companies in Hong Kong, many with ties to mainland China.
• CSI 300 – 300 largest A-shares from Shanghai and Shenzhen exchanges.

🇦🇺 Australia

• S&P/ASX 200 – 200 largest companies on the Australian Securities Exchange (ASX).

🇨🇦 Canada

• S&P/TSX Composite – Major index of the Toronto Stock Exchange.

🇮🇳 India

• BSE Sensex – 30 large companies listed on the Bombay Stock Exchange.
• Nifty 50 – 50 large companies on the National Stock Exchange of India.