FTSE Russell Insights

What is an index?

FTSE Russell

With the recent market volatility, indices have become a central feature of the daily news. As one of the world’s largest index providers, indices are our specialty. But for many people, indices are just numbers that go up and down to reflect market movements. Read on to get a better understanding of what those numbers mean and how they are calculated.

What is an index?

An index is a hypothetical portfolio of securities designed to represent an asset class, market or market segment. For example, the  well-known FTSE 100 Index measures the performance of the 100 largest companies with a sterling-denominated listing on the London Stock Exchange. 

The Russell US Indexes are many professional investors’ preferred benchmarks for the performance of US stocks, with two subsets—the large-cap Russell 1000® Index and the small-cap Russell 2000® Index—rolling up into the Russell 3000® Index.

These two index families are only a small subset of the many thousands of indices FTSE Russell administers and calculates across the world’s asset classes.

Indices play an important and informative role throughout the investment process. Economists use index data to analyse trends and investors base decisions on economists’ forecasts. Institutional investors use indices to conduct risk analysis, develop investment policies, and create asset allocation strategies. Nearly all types of investors use indices as benchmarks to evaluate the performance of their investment portfolios. Indices are also used as a basis for investable products such as mutual funds or ETFs.

How are index constituents chosen?

Index constituents—the stocks, bonds, or other financial instruments that make up a particular index—are selected using a methodology intended to capture the risk and return characteristics of a particular market or market segment. We rely on transparent, rules-based criteria rather than subjective selection, ensuring consistency and objectivity in constituent inclusion.

A systematic approach helps the index accurately reflect the investable opportunity set. For example, if a large-cap index omits eligible large-cap companies, investors using it for portfolio construction or benchmarking may face gaps in market exposure.

How are indices weighted? 

Indices constructed to measure the characteristics and performance of specific markets or asset classes are typically weighted by the market capitalization of their constituents. In these indices, each constituent’s weight is based on its total market value (its share price multiplied by the number of available outstanding shares). Russell pioneered the application of float, to include shares available for purchase, in the index, which is now industry standard, and reflected in index constituent weights. In such indices, a company’s size therefore determines its influence on the index: larger companies (by market cap) have a greater impact on the index’s performance than smaller ones.

There are also alternatively weighted indices, which are constructed using methodologies that are independent of constituents’ market capitalisation. These indices are designed to meet specific investment objectives, such as risk reduction or enhanced diversification. In such indices, stocks may be weighted equally or according to fundamental factors such as revenues, dividends or book value.

What does an index’s value represent?

In commentaries on stock market performance, many observers focus on the absolute level of a particular index: for example, is the FTSE 100 trading above or below 8000? The numerical value of an index tells us very little (see the next section on “divisors” for why). 

However, index values do reflect the aggregate price movements of the underlying constituents over time. To understand how, let’s look at an example showing how we calculate the value of a hypothetical market cap-weighted index with five constituents.

table show how we calculate the value of a hypothetical market cap-weighted index with five constituents.
Stock Name Stock Price Shares Included Market Value Index Weight
A $3 50 $150 15%
B $1 50 $50 5%
C $7 70 $490 51%
D $9 20 $180 19%
E $10 10 $100 19%
    Total Market Value $970 100%

The market value for each stock is calculated by multiplying its price by the number of shares in issue. Each stock’s weight in the index is then determined as its market value, divided by the total market value of the index.

Stock A, for example, has a share price of $3 and 50 shares in issue. Its market value is $150 ($3 X 50 = $150), whereas the total market value of the five shares in the index is $970. Stock A’s index weight is therefore c. 15% ($150/$970).

As the prices of constituent stocks fluctuate, the total market value of the index changes. The change in the index’s value over time indicates the performance of the market segment that the index represents.

What is an index divisor?

When an index is first created, a starting (base) value is chosen, which is arbitrary. In our example, we use 100 as the base value (but it could be 1000, 10000 or 12345). We determine the index “divisor” by dividing the total market value of the index by the base index value of 100 (in this case, $970/100 = 9.7).

Each day, as the market values of the stocks in the index fluctuate, based on changes to their prices, the new total market value of the index is divided by the same divisor (9.7) to produce a new index value:

table shows , as the market values of the stocks in the index fluctuate, based on changes to their prices, the new total market value of the index is divided by the same divisor (9.7) to produce a new index value
Day Index Total Market Value Divisor Index Value
Day 1 $970 9.7 100.0
Day 2 $1010 9.7 104.1
Day 3 $995 9.7 102.6
Day 4 $1000 9.7 103.1

The divisor remains constant until the index constituent set changes (something that happens fairly often). For example, if a stock is delisted, a stock split occurs, or stocks enter or depart the index based on changes in market capitalisation, the divisor will be recalculated to reflect the index’s new membership. Keeping the divisor up to date means that we can compare an index’s value over long periods of time, even if its make-up changes.

An index’s performance between any two dates can be calculated by dividing the ending index value by the beginning index value. Using our hypothetical index as an example: Day 1 index value = 100.0, Day 4 index value = 103.1, four-day performance = ((103.1/100) -1) x 100 = 3.1%.

Many market participants refer to absolute changes in index value in terms of index “points”. For example, if the FTSE 100 rose from 8250 to 8300, they would say it had gained 50 points. This terminology is also used for the price performance of individual shares and bonds.

Conclusion

Indices provide a structured, rules-based representation of markets or asset classes and serve as essential tools for benchmarking, risk analysis and passive investment. Understanding how indices work is fundamental to interpreting market performance and making informed investment decisions.

Read more about

Stay updated

Subscribe to an email recap from:

Disclaimer

© 2025 London Stock Exchange Group plc and its applicable group undertakings (“LSEG”). LSEG includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) FTSE Fixed Income Europe Limited (“FTSE FI Europe”), (5) FTSE Fixed Income LLC (“FTSE FI”), (6) FTSE (Beijing) Consulting Limited (“WOFE”) (7) Refinitiv Benchmark Services (UK) Limited (“RBSL”), (8) Refinitiv Limited (“RL”) and (9) Beyond Ratings S.A.S. (“BR”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, WOFE, RBSL, RL, and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “Refinitiv” , “Beyond Ratings®”, “WMR™” , “FR™” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of LSEG or their respective licensors and are owned, or used under licence, by FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, WOFE, RBSL, RL or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator. Refinitiv Benchmark Services (UK) Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.

All information is provided for information purposes only. All information and data contained in this publication is obtained by LSEG, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical inaccuracy as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or LSEG Products, or of results to be obtained from the use of LSEG products, including but not limited to indices, rates, data and analytics, or the fitness or suitability of the LSEG products for any particular purpose to which they might be put. The user of the information assumes the entire risk of any use it may make or permit to be made of the information.

No responsibility or liability can be accepted by any member of LSEG nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any inaccuracy (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of LSEG is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.

No member of LSEG nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset or whether such investment creates any legal or compliance risks for the investor. A decision to invest in any such asset should not be made in reliance on any information herein. Indices and rates cannot be invested in directly. Inclusion of an asset in an index or rate is not a recommendation to buy, sell or hold that asset nor confirmation that any particular investor may lawfully buy, sell or hold the asset or an index or rate containing the asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index and/or rate returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index or rate inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index or rate was officially launched. However, back-tested data may reflect the application of the index or rate methodology with the benefit of hindsight, and the historic calculations of an index or rate may change from month to month based on revisions to the underlying economic data used in the calculation of the index or rate.

This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of LSEG nor their licensors assume any duty to and do not undertake to update forward-looking assessments.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of LSEG. Use and distribution of LSEG data requires a licence from LSEG and/or its licensors.