Every day we hear about the Ibex, the Nasdaq or the Dow Jones as if everyone knew exactly what they represent. But what exactly are these indices? And what do those famous points that constantly rise and fall actually mean?

It’s time for the evening news. The presenter announces that the Ibex-35 has gained 240 points, that the Nasdaq has reached new all-time highs and that Wall Street is expected to open higher. The story lasts less than a minute and the programme moves on. We’ve heard it hundreds of times, yet if someone asked us what those points really mean, many of us would probably struggle to answer.

And that’s a shame, because stock market indices are much easier to understand than they seem. Once you discover what they represent, financial news stops sounding like a language reserved for experts.

The scoreboard of the markets

When we want to know how a football league is going, we don’t need to watch every single match. A quick glance at the standings is enough. In just a moment, we know who’s leading the competition, who’s dropping down the table and who’s enjoying a good run of form.

Stock market indices work in exactly the same way. They are not companies, nor are they the stock market itself. They are simply a scoreboard.

The Ibex-35 summarises the performance of thirty-five of the most representative companies listed on the Spanish stock exchange. The Nasdaq-100 does the same with some of the largest technology companies in the United States, while the Dow Jones and the Nikkei perform the same role in their respective markets.

Their purpose is to summarise, in a single figure, how this group of companies is performing. But this scoreboard has one particular feature: it doesn’t count goals, it counts points. And this is where the confusion usually begins. Points are not euros. They are not dollars either, nor do they represent a fixed amount of money. They are simply a unit of measurement.

We can think of them like the degrees on a thermometer. When the temperature rises from twenty to thirty degrees, nobody asks how many litres of heat there are outside. Degrees simply tell us that it’s warmer than before. Exactly the same thing happens with stock market indices. If the Ibex is trading higher today than it was yesterday, it simply means that, as a whole, the companies that make up the index are worth more than they were the previous day. The points merely measure that difference.

Why don’t all companies count the same?

If an index summarises the performance of many companies, it seems logical to assume that they all influence it equally. But that’s not the case.

Imagine a basket containing a watermelon, four apples and a handful of cherries. If you remove one cherry, the total weight barely changes. If you remove the watermelon, the difference is enormous. The same principle applies to stock market indices. The largest companies carry much more weight than the smaller ones. That’s why, when a company such as Inditex, Iberdrola or Santander experiences a sharp rise or a significant fall, it can pull a large part of the Ibex along with it. It is perfectly possible for many companies to finish the day higher while the index itself falls. And the opposite can also happen.

The stock market is not the entire economy

This is probably the most common misunderstanding.

When we hear that Wall Street has reached a new record or that the Nasdaq is enjoying an exceptional year, it’s easy to assume that the economy is thriving. But stock market indices only tell part of the story.

They reflect the performance of listed companies and, above all, investors’ expectations. The health of a country’s economy, however, also depends on wages, employment, consumer spending, housing prices and the situation of thousands of small businesses that are not even listed on the stock exchange.

That’s why the stock market can rise while many families continue to lose purchasing power. And the opposite can happen too. Stock market indices are an excellent thermometer for financial markets, but not for the economy as a whole.

Even the stock market has summer sayings

Like any other field, financial markets also have their own well-known expressions. One of the most famous is “Sell in May and go away.”

The saying originated more than a century ago in the City of London, when many wealthy investors left the capital during the summer months to spend time at their country residences. With fewer participants in the markets, trading activity declined, giving rise to the belief that the best time to invest began once autumn arrived.

As with all popular sayings, it doesn’t always come true. There have been outstanding summers for the stock market and terrible years outside that period. Even so, it remains one of the best-known expressions in the financial world.

Looking at stock market indices with different eyes

Every point gained or lost by an index is the result of thousands of decisions made simultaneously by investors around the world. It is not a prediction of the future, nor a verdict on the state of the economy. It is simply a snapshot of that particular moment.

Perhaps not all of us will end up investing in the stock market, but understanding what the Ibex, the Nasdaq or the Dow Jones actually represent allows us to follow economic news with a much more critical perspective.

Because the next time we hear that an index has gained 300 points or closed at record highs, we’ll know there’s no mystery behind the figure. Just as the scoreboard in a football match doesn’t tell the whole story of the game, stock market indices don’t tell the whole story of the economy. But they do help us understand, at a glance, which way the markets are moving.

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