Indices

An index is a single number that tracks the prices of a basket of shares, so you can see in one glance how a whole market did. The FTSE 100 follows the 100 biggest companies listed in London; the FTSE 250 follows the next 250; the S&P 500 follows 500 large US companies.

The number itself (10,694 for the FTSE 100 last night) has no meaning on its own. What matters is how it changes: a 1% rise in the index means the basket, on average, rose about 1%.

Most big indices use market-cap weighting. A company's market cap is its share price times the number of shares, so giants count for much more than minnows. In the S&P 500, a handful of tech giants like Apple, Microsoft, Nvidia and Alphabet make up a large slice of the index. When they move, the whole index moves.

Wednesday showed why it pays to know which index you're looking at. On Budget day the FTSE 100 inched up 0.1%, helped by banks (relieved the new bank tax was smaller than feared) and SSE, up 4.6%. But the FTSE 250 fell 0.3%, because it holds more UK-focused firms such as housebuilders, which slid 6-7%. Same country, same day, different story.

In the US, the S&P 500 rose 0.3% even though Nvidia fell 1.2%. Because it's weighted by size, the gains elsewhere in big tech outweighed it.

Indices also matter because you can buy one. A tracker fund simply copies an index. VWRP, for example, follows the FTSE All-World index of about 4,000 companies worldwide.

Two things to remember: an index tells you about the average, not about your own shares; and most indices you see quoted ignore dividends, so they slightly understate what investors actually earned.