MarketFrame

Guides / What is a stock market index? A plain-English explanation with UK examples

What is a stock market index? A plain-English explanation with UK examples

A stock market index is a published number that tracks a defined group of shares. An index provider builds it using fixed rules for which companies are included and how much each one counts. It is a measuring tool, so you cannot buy the number itself, and it says nothing about where prices go next.

By MarketFrame · Published 20 October 2026 · Updated 20 October 2026

Short answer: to read any index number you need to know three things. These are who chose the companies, how much each one counts, and whether the number tracks prices alone or prices plus dividends. The provider's rulebook answers all three, so that is the place to look.

The three decisions behind every index number

Any index you meet comes down to three choices:

Change any one of the three and the same shares produce a different number. So when a headline quotes an index, the first question is how it was built.

Who builds and publishes an index

An index provider writes the rules, applies them and publishes the result. In the UK the best-known provider is FTSE Russell, part of London Stock Exchange Group (LSEG). It runs the FTSE 100, the FTSE 250 and the wider FTSE UK Index Series. The rules for that series are in a public document, the FTSE UK Index Series Ground Rules.

The ground rules show how concrete the selection rules are. To be eligible, a share must be admitted to trading on the Main Market of the London Stock Exchange and have a free float of at least 10%. Free float means the part of a company's shares that investors can freely buy and sell. Holdings with restrictions on them are left out. The FTSE 100 is then made up of the largest 100 qualifying UK companies by full market capitalisation. The FTSE 100 guide covers that index in detail.

Price-weighted and market-capitalisation-weighted: why the weighting matters

Weighting decides who moves the number. FTSE Russell's factsheet describes the FTSE 100 as a market-capitalisation weighted index. A company's weight follows its stock market value, so the largest companies pull hardest. A big move in a small constituent can matter less to the index than a modest move in one of the giants.

The FTSE ground rules add a refinement: constituents are adjusted for free float. This creates a split. Companies are ranked for entry by their full market capitalisation, but their weight inside the index reflects the shares that are freely available. Two companies of similar headline size can therefore count differently.

Another method you will see described is price weighting. Here each company's share price sets its weight, whatever the size of the business. Under that method a company with a high share price can matter more than a much larger company with a low one. The method chosen changes what the number measures.

Price index versus total return index

This third decision is the easiest one to miss. The FTSE ground rules say both capital (price) and total return versions are calculated for certain indices. A price index tracks the change in share prices only. LSEG describes the FTSE 100 Total Return Index as combining capital performance with income, reinvested on the ex-dividend date.

So before comparing two charts, check which kind each one shows. A price line and a total return line for the same index will separate over time, and the gap is the dividends, not an error. The guide on reading a long-term FTSE 100 chart explains what the line includes and leaves out.

Broad and narrow indices: examples from the UK

Indices also differ in how much of the market they cover. The FTSE UK Index Series makes a good ladder:

Each index answers a different question, so "the UK market" is never one number. Indices in other countries work the same way, with their own providers and rulebooks. Before deciding what a move means, ask what the index covers.

What an index is not

An index is a calculation. Nobody can buy it, hold it or pay money into it. What people buy are products designed to follow an index. Those products are separate from the index and have their own costs and rules. The guide to routes to the FTSE 100 explains how that works, as general information.

An index is also separate from a stock exchange. The London Stock Exchange is a market where shares are listed and traded. The FTSE 100 is a number calculated from a selected group of those shares. One is a place and the other is a measurement.

How to read a headline about an index move

When a headline says an index rose or fell, ask four questions:

  1. Which index is it, and who publishes it?
  2. Is the figure a price index or a total return index?
  3. Which companies carried the move, given the weighting?
  4. What period is the change measured over?

Most headlines answer only the first. A rise driven by two or three of the largest companies says something different from a broad lift across many, and the headline number cannot tell you which happened. To see the company stories behind a day, the FTSE news hub lists each company's coverage.

Where a news tone score fits, and where it does not

MarketFrame reads the UK business news on every FTSE 100 company each morning. It scores the tone of that coverage from -10 (clearly bad news for the company) to +10 (clearly good). The daily archive starts on 30 September 2026, and every company and 17 sectors are listed in the news analysis.

The limit is firm. A tone score describes how the coverage reads. It is not share-price data, a forecast or advice. The same goes for the index: today's move does not predict tomorrow's. Neither an index figure nor a tone score tells you where prices will go.

Where to check an index's official rules

Go to the provider. FTSE Russell publishes the FTSE UK Index Series Ground Rules and index factsheets on its LSEG pages. Those documents set out eligibility, free float, weighting and the review process. The ground rules state that the series is reviewed every quarter, which is why any copied list of members soon goes out of date. Read the rulebook for how membership is decided, and check MarketFrame's company and sector list for the companies it covers.

Questions people ask

What is a stock market index in simple terms?

It is a published number that tracks a defined group of shares. An index provider sets fixed rules for which companies are in it and how much each one counts. You can follow the number, but you cannot buy it directly.

What is the difference between a stock market index and a stock exchange?

A stock exchange, such as the London Stock Exchange, is a market where shares are listed and traded. An index is a number calculated from a chosen group of those shares. The FTSE UK Index Series, for example, draws its companies from shares admitted to trading on the London Stock Exchange's Main Market.

Who decides which companies are in an index?

The index provider decides, using rules it publishes. For the FTSE UK Index Series, FTSE Russell sets those rules in its ground rules document. It covers eligibility, free float, how companies are ranked and how the index is reviewed.

Why do indices change when companies are added or removed?

The rules decide who qualifies. A company that grows or shrinks, or stops meeting the eligibility rules, can move in or out at a review. FTSE Russell reviews the FTSE UK Index Series every quarter. A change in membership also changes which companies move the number.

Is a stock market index the same as the economy?

No. An index tracks a chosen group of listed shares, weighted by size. Many businesses are not listed, and large listed companies can earn much of their money abroad, so an index move cannot stand in for the state of the economy.

Sources