What is an Index?

What is an Index?: Section 1 of 5

You've heard about them in the news, you've heard they're easy to trade, but what exactly are index products?

First, let's define an index. Simply put, an index represents a "basket" or portfolio of stocks or commodities, grouped in a particular way (e.g., the S&P 500 Index is made up of large-capitalization stocks; the Russell 2000® Index is based on small-capitalization stocks). How a particular stock or commodity index tracks the market depends on its composition - the stocks or commodities included in the index, the percentage weight of each component, and the method of calculating each index. The index comprising these stocks or commodities is typically called the "underlying" or "cash."

Index futures and options closely follow the price movement of these underlying indexes. Index futures are a type of forward contract, which means they are agreements to buy or sell their underlying product at a specific price on a specific date in the future.