What is an Index?

An index is a relative indicator used to represent comprehensive changes. In the financial sector, it typically refers to a securities price index that reflects the overall price movements of stocks, bonds, and other assets.

Indices possess the characteristics of relativity and averaging, enabling them to reflect the overall changes in complex phenomena.

What Can Indices Do?

Representation Function

For investors, the rise or fall of an index's value can indicate the changing trends of specific markets or sectors. This was the primary purpose when stock indices were first created, known as the representation function.
Indices have a representation function, objectively reflecting market movements and providing analysts, investors, and other participants with tools to analyze market trends.

Performance Benchmark

Investment performance consists of two parts: one contributed by the market itself, and the other from active investment returns, which reflect the fund manager's ability to select stocks and time the market. This is often referred to as distinguishing between beta returns and alpha returns.
Therefore, when evaluating a securities investment fund, simply considering absolute returns does not fully reflect the fund manager's asset management capabilities; market conditions must also be taken into account.
Since indices reflect the average performance of specific markets, sectors, or strategies, they are the most common performance benchmarks. Investors can select corresponding benchmark indices based on the investment category, region, industry, or strategy of their portfolio. By comparing investment performance with the benchmark index, the fund manager's investment capabilities can be assessed.

Underlying for Investment Products

Ordinary investors cannot directly invest in an index, but they can invest in various index-based products, such as index funds, ETFs, and feeder funds.
The goal of index-based products is to replicate the performance of the index. The concept of index investing emerged in the 1970s and, after more than 50 years of development, has become one of the primary investment strategies and methods.
The rise of index funds has driven the development of index derivatives. Today, index-related derivatives such as stock index futures and stock index options are widely used by various institutional investors.