Why are index funds called index funds?
1 Answer
Because they track an index.
Edited: The definition of the word in this case meaning "something used or serving to point out; a sign, token, or indication" from Meaning #3
I presume therefore you are asking what an index is?
There are many variations of what makes up an Index but in short it is a representation of some part of a market.
An extremely simplistic calculation would be to take a basket of stocks, and sum their prices. If one stock moves up a dollar, and one moves down a dollar, the index has effectively not changed, as it is presumed that the loss in one is offset by the gain in the other.
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I know what an index is, I just don't understand why it's named the way it is. I am not a native English speaker, so that may have something to do with it, but the way I understand the word index (from mathematics or computer science) doesn't explain to me why an index is named thus. Mar 29, 2010 at 22:52
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Added a definition link above: index points to something, in this case, using a subset of stocks to point to the overall performance of the market.– sdgMar 30, 2010 at 12:46
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@ripper234: Imagine the index at the back of the book, that points to the most relevant concepts in the book. Similarly, a stock index attempts to point at the most relevant stocks in the market, or a specific sector. Mar 30, 2010 at 13:08
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