Lesson 1 of 3 · 2 min · Funds
What an index really is
A list of companies, and a rule for how much of each.
An index is a list of companies with a rule attached. The S&P 500 lists about 500 large US companies. It does not pick winners. It just measures.
The rule for how much of each is usually size. A company worth twice as much makes up twice as much of the index. This is called market value weighting.
So the biggest companies count the most. At the end of 2024, the ten biggest made up more than a third of the S&P 500.
An index fund simply buys everything on the list, in the same amounts. It needs no star manager, so it can be very cheap to run.
When a company grows, its share of the index grows by itself. When it shrinks, it fades out. The fund follows without anyone deciding.
Quick question
In a market value weighted index, which company counts the most?
- The one with the highest share price
- The one worth the most in total
- All count the same
Show the answer
The one worth the most in total
Share price alone says nothing about size. What counts is the whole company’s market value: price times the number of shares.
Keep this one
An index is a list with a rule.
Where this comes from
S&P Dow Jones Indices, S&P 500 methodology (float adjusted market value weights). Top ten weight from S&P 500 fact sheets for the end of 2024.