Investing Basics
An index measures; a fund tracks; the two are not the same
A market index is a rules-based measurement of a group of securities — for example, the S&P 500 tracks 500 large U.S. companies, the Nasdaq Composite tracks Nasdaq-listed stocks, and the Dow Jones Industrial Average tracks 30 large companies price-weighted. Most broad indexes are capitalization-weighted: larger companies move the index more. An index has no shares, no fees and cannot be bought directly.
Explainer Reviewed 08-21-2026
What it is for
This distinction prevents the common mistake of treating an index level as an investment return. An index fund's return differs from the index by fees, tracking difference and timing. Knowing whether an index is cap-weighted or price-weighted explains why the same news moves different indexes differently.
What it cannot tell you
An index level does not tell you whether the market is cheap or expensive, diversified or concentrated, or likely to rise. Index rules and constituents change. This guide names no level and makes no forecast.
How to verify the object
For methodology, open the index provider's official methodology document (S&P Dow Jones Indices, Nasdaq, FTSE Russell). For a fund tracking an index, open the prospectus and compare the fund's holdings, costs and tracking difference against the index it names. Match the index name exactly — similar names can follow different rules.
Education only. Not individualized advice.