When people talk about investing, they sometimes refer to stock indexes and stock exchanges. And while they may sound like the same thing, they aren’t.
A stock index is a gauge to read the whole market, or sector of the market. In contrast, an exchange is the place where you buy and sell stocks, bonds, and other securities that are listed on various indexes.
Here’s a quick primer.
An index is a grouping of company stocks that measures change in the broader stock market, or a sector of the stock market.
Some examples of famous indexes include the Dow Jones Industrial Average, often referred to as the Dow. It includes 30 of the largest companies in the U.S.
The S&P 500 index is made up of the 500 largest companies in the U.S., including names such as insurance company Allstate, home construction and refurbishing company Home Depot, and Walmart, the largest retailer in the world.
The NASDAQ is an index with a high concentration of technology stocks. It consists of the stocks of more than 3,200 companies. In addition to Amazon, Apple, and Facebook, other well-known tech names include Google’s parent company Alphabet, computer network router maker Cisco Systems, and computer software and services giant IBM.
Generally speaking, each company in an index is assigned a weight in a mathematical calculation that creates the final index number.
That weight can be based on the stock share price, as it is with the Dow. It can also be based on market cap, a reflection of a company’s value, which is how the S&P is calculated. Some indexes might also combine both to assign the weight.
As individual share prices or market caps move up and down, those changes affect the total point value of the individual index.
What’s an exchange?
Exchanges are the actual places where stocks are bought and sold. One of the most famous exchanges, called the New York Stock Exchange (NYSE), is headquartered on Wall Street, in New York.
The NASDAQ, located in Midtown Manhattan, is also an exchange where traders buy and sell the stocks that make up the NASDAQ index. The index is a purely electronic exchange. The NYSE combines an electronic exchange with live people who help execute stock trades.
And there are exchanges all over the world. Japan has the Tokyo Stock Exchange. Brazil has the B3. England has the London Stock Exchange.
When you place an order to buy or sell stocks, bonds or other securities, an exchange will ultimately play a role in the transaction.