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An index is a measurement tool that shows how a group of shares develops on average. It presents in a single figure whether a market is rising or falling. An index itself is not a company and not a share, but a calculated value.
An index is often used as a benchmark for the performance of an entire market.
An index consists of multiple companies that together represent a specific part of the market. For example, the AEX tracks the largest Dutch companies, while the S&P 500 follows 500 large American companies.
Because the performance of many companies is combined, extreme movements in one share are often offset by other shares within the index. As a result, an index usually fluctuates less than a single share, making it a more stable benchmark for the market as a whole.
Short example:
Suppose an index consists of 10 shares. If one share declines by 20% while the other 9 shares remain unchanged, the index will decline only slightly. If all shares together increase on average by 5%, the index will also rise by approximately 5%. The index therefore reflects the overall average and is less sensitive to outliers.
Disclaimer: Investing involves risks. Our analysts are not financial advisors. Always consult a professional advisor when making financial decisions. The information and tips provided on this website are based on the personal insights and experience of our analysts and are intended for educational purposes only.
