A stock market index is essentially a group of companies that are all listed on the same stock market. Indices are formed as a way for investors to track the performance of a specific group of stocks.
Stock market indices can be created based on a number of different characteristics. The most common characteristic is size, where an index will include the largest companies on a particular stock market.
There is no limit on the number of stocks that can be included within an index. For instance, the most famous indices are the S&P 500, FTSE 100 and Nikkei 225, which include 500, 100 and 225 companies.
Stock indices are useful for investors because they can be used as a benchmark to measure the performance of their own stocks. It is common for investors to try and out-perform a specific index.
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