You may hear talk about stock exchanges and stock indices, and it’s easy to confuse them as the same thing. In this article, we highlight what each means and show why they are relevant to your investing strategy. A stock index is a list of stocks that is created to gauge the whole market, or even a sector of the market. A stock exchange, on the other hand, is the actual place where you can buy and sell stocks, bonds, and other securities that are listed on different indices.
Let’s look at some details below.
An index groups together company stocks in order to measure changes in the broader stock market, or in a sector of the stock market. There are famous examples that you may have heard of, such as the FTSE100. This index includes the 100 largest companies in the UK.
Indices can also exist for smaller companies, for example the Alternative Investment Market (AIM), which is a subsidiary of the London Stock Exchange and allows smaller companies to raise capital with less restrictions. Each index has its own measure of how exactly it’s valued. This could be based on the cumulative share price of the individual stocks, or it could be based on the total market capitalisation in the index. Some even combine both measurements. As the individual share prices or market caps move up and down within the index, the total value of the individual index changes too.
If you actually want to buy a stock, then you’ll have to turn to an exchange. One of the largest and most famous stock exchanges in the world is headquartered in the UK: the London Stock Exchange. There are exchanges all over the world, including the Tokyo Stock Exchange in Japan, the B3 in Brazil, and the New York Stock Exchange in the US. Whenever you go to place an order to buy or sell stocks, bonds, or other securities, the exchange will ultimately be involved in the transaction.