An index is a way of measuring a group of things as if they were one thing.
You've probably heard of the S&P 500. That's an index. Specifically it's a list of 500 of the largest publicly traded companies in the United States — companies like Apple, Microsoft, Johnson & Johnson, and JPMorgan Chase. The S&P 500 tracks how all 500 of those companies are doing together, combined into a single number.
When you hear "the market was up 1.2% today" on the news, they're usually talking about an index like the S&P 500 or the Dow Jones Industrial Average. The index gives you a single snapshot of how a broad group of companies is performing at any given moment.
A simple analogy
Think of it like a class grade point average. Instead of looking at every student's individual grade, the GPA gives you one number that represents how the whole class is doing.
An index does the same thing for a group of companies. Instead of tracking Apple, Microsoft, and 498 other companies separately, the S&P 500 gives you one number that tells you how all of them are doing together.
The most important indexes
S&P 500
Tracks 500 of the largest U.S. companies. The most widely used measure of the overall U.S. stock market. This is the index the grandma calculator is built around.
Dow Jones Industrial Average
Tracks just 30 large U.S. companies. One of the oldest indexes — you'll hear it mentioned on the news constantly, but it's a narrower picture than the S&P 500.
Nasdaq Composite
Tracks over 3,000 companies listed on the Nasdaq exchange, heavily weighted toward technology companies like Apple, Amazon, and Google.
Total Market Index
Tracks virtually every publicly traded U.S. company — thousands of them. The broadest possible snapshot of the U.S. stock market.
Why does an index matter to you?
On its own, an index is just a measuring tool — a number that tells you how a group of companies is doing. You can't directly invest in an index any more than you can invest in a class GPA.
But once you understand what an index is, the next idea — an index fund — becomes much easier to understand.
An index fund is an investment product that tracks an index. When you buy shares of an S&P 500 index fund, you're essentially buying a tiny piece of all 500 companies in the index at once — automatically, at very low cost, without having to pick individual stocks.
~500
Companies you own a piece of when you invest in a single S&P 500 index fund. Apple. Microsoft. Johnson & Johnson. Berkshire Hathaway. All of them, at once, for the price of one share.
This is why index funds changed everything for everyday investors. Before they existed — invented in 1976 by John Bogle at Vanguard — investing required either picking individual stocks (hard, risky) or paying expensive fund managers to do it for you (costly, and most of them still underperform the index anyway).
Index funds made it possible for anyone to own a piece of the entire market at almost no cost. That's the tool this site is built around.
The S&P 500 and the grandma calculator
Every number in the grandma calculator is based on real S&P 500 annual returns going back to 1950. The index went up some years and down others — including drops of 37% in 2008 and 26% in 1974. But over every long period in its history, it has recovered and reached new highs.
That's not a guarantee about the future. But it's the most reliable long-run track record of any major asset class in history. And it's the record your grandmother would have been building on — if she'd had access.