An index, when used with respect to financial markets, is a statistical measure of change in a securities market. Indexes, or indices (both are correct in American English), are imaginary portfolios of securities (usually stocks) representing a particular market or a portion of it.
This is the chart for the Dow Jones Industrial Average. Scroll down for a list of major world indices on Wikinvest.
Generally, an index has three main purposes:
Each index is calculated using its own methodology, and its value is expressed in terms of a change from an original base value. So the numerical value of an index is not as significant as the percent change in the index.
Investing in indexes is a way to invest in the performance of a broad market sector, or in the market as a whole. But to trade an index, an investor must buy or sell through a third party. Stock and bond market indexes are used to make mutual funds and exchange-traded funds (ETFs) that mirror the performance of the index. Regardless of security type, indexing can cover broad categories such as a Total Market Index like (VTI), index investing can also be more micro and track sectors such as Small Cap Brazilian Companies (BRF).
When investing in an Exchange Traded Funds that tracks an index, an investor buys or sells an entire group of stocks when trading that particular ETF - an example is the StreetTRACKS Dow Jones Global Titans Index Fund (DGT). Some indexes allow investors to put money into commodities - an example is the PowerShares DB Commodity Index Tracking Fund (DBC) - while others, like the Baltic Dry Index (BDI), are important economic indicators used to measure the rates under which services are sold in a particular industry (in the case of the BDI, dry bulk shipping). Still others are forward looking, measuring the anticipated volatility of the markets - an example is the Nasdaq Volatility Index (VXN).
There are many products available to investors to give them exposure to international indices. Mutual Funds and ETFs are the most widely held instruments which investors use to track markets around the world. Some examples of Major World Indices would be MSCI Emerging Market Index (EEM), MSCI EFAE Index (EFA), or Vanguard Emerging Markets (VWO). These are just a few examples of common securities offered to investors seeking exposure to an international world market index.
It is important to consider the currency risks of investing in many international index funds as well as the potentially higher costs associated with the transactions needed to operate the fund (trading, taxes, etc).