What is a stock market index? How the S&P 500 and FTSE work
What is a stock market index? How the S&P 500, Dow, FTSE 100 and Nifty 50 pick companies and calculate their points, and why the Dow and S&P can disagree.
Why it matters
Index moves are how the news reports markets, and they decide the value of many pension and savings funds. Knowing how an index is built tells you what a headline move really means.
A stock market index is a single number that tracks the combined value of a chosen group of shares, so one figure can stand in for hundreds of companies. When the news says “the market fell”, it means an index did. On Friday 23 October 2026 the Dow Jones Industrial Average dropped 1.23%, while the S&P 500 lost only 0.52%. Same country, same day, two different answers.
Quick answer: An index picks companies by set rules (size, where they are listed, sometimes profits), gives each one a weight, and reports the total as points measured from a starting value. Most big indexes weight companies by their market value, so the largest firms move them most. The Dow and Japan’s Nikkei 225 weight by share price instead.
| Index | Close on 23 Oct 2026 | Change on the day |
|---|---|---|
| S&P 500 (US) | 7,623.68 | down 0.52% |
| Dow Jones Industrial Average (US) | 52,215.16 | down 1.23% |
| Nasdaq Composite (US) | 25,955.34 | down 0.21% |
| FTSE 100 (UK) | 10,690.36 | down 0.32% |
Source: Yahoo Finance and MarketScreener, 23 October 2026.
How an index turns share prices into points
Most modern indexes are weighted by market value, usually counting only the shares that are actually available to trade (the “free float”), and leaving out large blocks held by founders, governments or other companies. A company worth 10 times as much as another has 10 times the influence on the index.
The S&P 500 works like this:
- Count the tradable shares of each company in the index.
- Multiply by the latest share price to get each company’s float-adjusted market value.
- Add up all the values.
- Divide by a number called the divisor, which S&P Dow Jones Indices adjusts whenever companies join or leave or issue new shares, so the index moves only when prices move.
The points themselves mean nothing on their own. The FTSE 100 started at 1,000 on 3 January 1984 and closed at 10,690.36 on 23 October 2026, which tells you UK blue-chip share prices are roughly ten times higher than in 1984. Dividends are left out of these headline price indexes; providers such as FTSE Russell publish separate “total return” versions that add them back.
Why the Dow and the S&P 500 can tell different stories
The Dow is older and stranger. Charles Dow first published it on 26 May 1896 with 12 industrial companies and a value of 40.94. It grew to 20 companies in 1916 and to 30 in 1928, the number it still holds, and it is still price-weighted: S&P Dow Jones Indices adds up the 30 share prices and divides by a divisor. A company with a $500 share price moves the Dow far more than one with a $50 share price, whatever their actual size.
That is why the two indexes split on 23 October. A sharp fall in a few high-priced Dow members can drag the Dow down while the broader, value-weighted S&P 500 barely moves. Japan’s Nikkei 225, which Nikkei Inc. calculates from adjusted share prices of 225 Tokyo-listed companies, has the same quirk. It dates from September 1950 and is reviewed twice a year, in April and October, with Nikkei weighing trading volume and a balance across industries when it picks members.
| Index | Market | Companies | Weighted by |
|---|---|---|---|
| S&P 500 | US | about 500 | Float-adjusted market value |
| Dow Jones Industrial Average | US | 30 | Share price |
| FTSE 100 | UK (London) | 100 | Free-float market value |
| Nikkei 225 | Japan (Tokyo) | 225 | Adjusted share price |
| Nifty 50 | India (NSE) | 50 | Free-float market value |
| Sensex | India (BSE) | 30 | Free-float market value |
Source: S&P Dow Jones Indices, FTSE Russell, Nikkei Inc., NSE Indices and BSE.
India’s two main indexes use the same value-weighted method as London and New York, with one local twist that matters for readers there: shares held by a company’s promoters (the founding family or parent group that controls it) are treated as locked in and left out of the free float. A company with a large promoter stake therefore counts for less in the Sensex or Nifty 50 than its total market value would suggest.
How a company gets into the S&P 500 or the FTSE 100
The two biggest English-language indexes choose members in opposite ways.
The S&P 500, launched on 4 March 1957, is picked by a committee at S&P Dow Jones Indices. A company must be based in the US, be large enough to pass a size threshold that S&P reviews regularly, trade actively, and have positive reported earnings both in its latest quarter and over the past four quarters combined. Meeting the rules does not guarantee a place; the committee decides. The index covers about 80% of the value of the US stock market available to investors, according to S&P Dow Jones Indices.
The FTSE 100 is mechanical. Under FTSE Russell’s ground rules, the UK indexes are reviewed every March, June, September and December. A company joins if its market value ranks 90th or higher among eligible London-listed companies, and leaves if it falls to 111th or lower. The gap between 90 and 111 is a buffer that stops companies bouncing in and out every quarter. Shares need a free float of at least 10% to qualify.
The FTSE 100 is often read as a gauge of the British economy, and it is a poor one. Many members earn most of their money abroad. On 23 October 2026, BP and Shell rose as Brent crude climbed above $115 a barrel.
What happens when a company joins an index
For decades, joining the S&P 500 lifted a company’s share price, because funds that copy the index had to buy it. In a 1986 study the economist Andrei Shleifer found that shares added to the index between 1976 and 1983 rose by 2.79% on the news.
That effect has nearly vanished. The economists Robin Greenwood and Marco Sammon found the average jump on inclusion fell from 3.4% in the 1980s and more than 7% in the 1990s to 0.8% in the decade to 2020, even as far more money came to track the index.
The concentration problem in value-weighted indexes
Weighting by value means an index increasingly reflects its biggest members. By mid-2025 the 10 largest companies made up almost 40% of the S&P 500, a level of concentration not seen since the mid-1960s, according to research from S&P Dow Jones Indices. A day when a handful of large technology companies fall can now pull the whole index down even if most of its 500 members rise.
This shapes the old argument between index funds and active fund managers. S&P Dow Jones Indices’ SPIVA scorecard found that 67% of actively managed large US company funds trailed the S&P 500 in the first half of 2026, an improvement on 79% for 2025. An index fund simply holds the index, concentration included.
How to read an index move in the news
Look at the percentage, never the points. The Dow’s 652-point fall on 23 October 2026 was 1.23%. On 19 October 1987, Black Monday, it fell 508 points, which was 22.6% of its value at the time, and the S&P 500 lost about 20% the same day. The Dow took until January 1989 to climb back to its pre-crash level.
Check which index is being quoted. “Stocks fell” can mean the Dow, the S&P 500 or the Nasdaq, and on many days they disagree. And remember that a falling FTSE 100 can reflect oil prices or the pound as much as anything happening in Britain. Our guides to interest rate decisions and how inflation is measured cover the two releases that move indexes most.
This article is for information only and is not financial advice.
