What Is a Stock Index and How Does It Work?

How Is a Stock Index Calculated?

Most major indices use one of two calculation methods:

Market Capitalisation Weighted

Market capitalisation is one of the most widely used methods. Each company's influence on the index is proportional to its total market value — the larger the company, the greater its impact on the index's movements.

Example: In a market cap weighted index, a 5% move in a large company worth £500 billion has a far greater effect than a 5% move in a smaller company worth £10 billion.

Major market cap weighted indices include the FTSE 100, S&P 500, NASDAQ 100, and MSCI World.

Price Weighted

Each company's influence is proportional to its share price rather than its total market value. A higher-priced stock has more influence regardless of the company's overall size.

The Dow Jones Industrial Average (DJIA) is the most prominent price-weighted index.

^{Why Do Stock Indices Matter?}

Indices serve several important functions for traders, investors, and the broader economy:

Market barometer — indices provide an instant read on market sentiment and economic confidence. A rising index generally signals positive investor sentiment; a falling index signals concern or uncertainty.

Benchmark for performance — fund managers and investors use indices to measure whether their portfolio is outperforming or underperforming the broader market. Beating the index is the standard measure of active management success.

Economic indicators — indices often reflect the health of the underlying economy. The FTSE 100 reflects confidence in UK-listed multinationals; the S&P 500 is widely used as a proxy for the health of the US economy.

Trading and investment vehicles — indices themselves are tradeable through CFDs, ETFs, and futures contracts, allowing traders and investors to gain broad market exposure without picking individual stocks.

The World's Major Stock Indices

UK 100 (FTSE 100)

The UK's benchmark index, tracking the 100 largest companies by market capitalisation listed on the London Stock Exchange. Constituents include global multinationals across financial services, energy, consumer goods, and mining. Because many FTSE 100 companies earn revenues in foreign currencies, the index is often inversely correlated with sterling — a weaker pound can push the index higher as overseas earnings are worth more in GBP terms.

US 500 (S&P 500)

US 500 is widely considered the world's most important stock index, tracking 500 of the largest US-listed companies. It is the primary benchmark for global equity markets and a key indicator of US economic health. Technology companies — including Apple, Microsoft, Nvidia, and Amazon — have an outsized influence due to their enormous market capitalisations.

US Tech 100 (NASDAQ 100)

Tracks the 100 largest non-financial companies listed on the NASDAQ exchange, with a heavy weighting toward technology. More volatile than the broader S&P 500 due to its concentration in growth-oriented tech stocks. Highly sensitive to interest rate expectations — rising rates tend to weigh on high-growth tech valuations.

DE 40 (DAX)

Germany's benchmark index, tracking the 40 largest companies listed on the Frankfurt Stock Exchange. Heavily weighted toward industrials, automotive, and chemicals — making it sensitive to global manufacturing activity, trade flows, and the health of the European economy. Key constituents include SAP, Siemens, Allianz, and Adidas.
 

Other Major Global Indices

What Moves Stock Indices?

Indices are driven by a combination of macroeconomic, political, and market-specific factors:

Interest rates — central bank rate decisions are one of the most powerful drivers of index performance. Rate cuts typically boost indices by reducing borrowing costs and making equities more attractive relative to bonds. Rate hikes can weigh on indices — particularly growth-heavy ones like the US Tech 100.

Economic data — GDP growth, employment figures, inflation, and retail sales all signal the health of the underlying economy and influence index direction. Strong data generally supports indices; weak data pressures them.

Corporate earnings — because indices are composed of individual companies, earnings seasons — when companies report quarterly results — can cause significant index moves. A series of strong earnings from large-cap constituents can drive an index significantly higher.

Geopolitical events — wars, trade disputes, elections, and political uncertainty can cause sharp index moves, particularly in indices with high exposure to affected sectors or regions.

Currency movements — for internationally exposed indices like the FTSE 100, currency movements can significantly affect performance. A weaker GBP tends to support the FTSE 100 as overseas revenues are worth more when converted back to sterling.

Market sentiment — broader risk appetite across global markets influences capital flows into and out of equities. In risk-off environments, indices typically fall as investors move toward safer assets such as bonds and gold. Read our guide to understanding forex volatility for more on how macroeconomic factors drive market movements across asset classes.

How to Trade Stock Indices

There are several ways UK traders and investors can gain exposure to stock indices:

Index CFDs

CFDs allow you to speculate on the price movement of an index without owning the underlying stocks. You can go long (profit from a rising index) or short (profit from a falling index), with leverage available up to 1:20 for major indices under FCA rules.

Index CFDs are one of the most popular instruments for short to medium-term traders due to their liquidity, tight spreads, and the ability to trade in both directions.

XTB offers CFDs on all major global indices including:

• UK 100 — FTSE 100
• US 500 — S&P 500
• US Tech 100 — NASDAQ 100
• DE 40 — DAX 40

Index ETFs

ETFs that track stock indices allow investors to gain long-term exposure to an entire index through a single fund. Unlike CFDs, ETFs involve no leverage and no overnight financing charges — making them better suited to long-term investors than short-term traders.

Popular index-tracking ETFs include those tracking the S&P 500, FTSE 100, MSCI World, and NASDAQ 100.

Investment Plans

For long-term investors who want structured, theme-based exposure to global markets, XTB Investment Plans allow you to invest in a curated basket of assets — including index-tracking ETFs — aligned to specific themes and sectors. 

Index CFDs vs Index ETFs: Which Is Right for You?

For a deeper comparison of ETFs and direct investment products, read our guide to ETF vs Shares.

Index Composition: How Companies Enter and Leave

Indices are not static — their composition is reviewed periodically by the relevant index provider. Companies enter an index when they grow large enough to meet the inclusion criteria; they leave when they no longer qualify — typically due to falling market capitalisation, delisting, or merger.

For the FTSE 100, quarterly reviews are conducted by FTSE Russell. For the S&P 500, the S&P Index Committee meets regularly to assess constituent eligibility.

Index rebalancing events — when companies are added or removed — can cause significant price movements in the affected stocks, as index-tracking funds must buy or sell the relevant shares to reflect the new composition. These events are closely watched by traders for short-term opportunities.

Indices and Sector Exposure

Different indices offer different sector exposures — an important consideration when choosing which index to trade or invest in:

Understanding sector composition helps traders anticipate which macroeconomic events are likely to have the greatest impact on a specific index. Rising oil prices, for example, tend to support the FTSE 100 due to its large energy sector weighting — but may weigh on the US Tech 100, where energy costs are a significant overhead for large data centre operators.

Risk Warning

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.