Index refers to a system that measures the value of a certain product in contrast to its most recent values. It also pertains to a defined standard that may also be made a reference. Index may also refer to a financial instrument that is used to stand for a group of individual prices or data points.
The calculation for an index usually entails the consideration of a specific value from a myriad of prices and quantities within a certain period. This makes it a useful tool for tracking the price of a specific asset or a basket of assets.
With the context of the financial markets, indexes are usually based on a list of various stock quotes and are commonly used to track how the Stock Market performs. This is done through statistical measure of changes—these act as a small sample that represents a great portion of the entire stock market.
Indexes follow a particular set of rules and methodology of calculation. However, the value variation of an index should reflect a proportional change in the stocks.