A stock index is a weighted benchmark used in measuring the performance of an entire stock exchange or a specified group of shares or a sector of a stock market.

The value of a stock index is calculated on the basis of a change in the price of the stock assets listed in a particular sector or a particular exchange being measured.

For instance, the value of a stock index such as the S&P 500 in US is a function of the change in prices of the stocks of the 500 largest companies in the New York Stock Exchange. In most cases it is the value of each share of stock making up the index or a formula based on those value.

What makes stock indices tradable is the fact that the change in price of the component stock assets produces a change in the value of the index, and this intraday volatility can then be used by traders to setup long and short trades on specific indices.

You also have indices such as the Dow Industrials or the Dow Transportation and others. These are the value of specific shares of companies trading in these specified industries. It is important that traders understand these contract specifications so as to know how to set the trades.

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