What does it mean exactly when an index rises? How indices are built.
An index expresses the price change of a rule-selected basket of stocks as a single number. Which stocks are included and how much each counts are set by rules. The most common approach weights by company size, so price changes in large companies move the index more.
In a size-weighted index, the top few constituents account for a large share of the movement. That is why days occur where the index rises while most stocks fall. It is worth knowing that 'the market rose' is not the same statement as 'most companies' shares rose'.
An index is not a fixed list; constituents enter and leave periodically by rule. Companies failing the criteria drop out and newly grown ones enter. Long-run index performance therefore includes the effect of the surviving and growing companies remaining. It is one reason holding an individual stock differs from tracking an index.
Funds and listed products exist that follow an index directly. Their characteristic is resolving in one holding what would otherwise mean buying many stocks and maintaining weights. Products differ in which index they follow and in total expenses and actual tracking difference, though. Similar names can hold different things, so check which index is tracked.
Look at which index it tracks, total expenses, how far it has actually diverged from the index, and whether size and trading volume are sufficient. Products using derivatives to move at a multiple of an index are a different kind of instrument and are frequently unsuited to long holding. This explains the structure and recommends no product.
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