Composite Indexes: Understanding Financial Benchmarks & Their Use

A composite index is a combination of securities into a group so as to provide some type of financial indicator about the group as a whole. Composite indices are commonly used by financial organizations in order to gauge the performance of certain securities as a group.

One of the most common examples of a composite index is the S&P 500. The S&P 500 is a composite index that includes 500 of the top companies in the stock market. They combine the values of all of the outstanding shares of these companies in order to come up with a total value for the S&P 500 companies. 

The composite index can be used for other purposes such as providing a basis for trading for mutual funds. Many index funds will simply track the movements of a particular financial index in order to provide returns for investors.

By investing in a particular financial index, an investor typically hopes to diversify their investment so that it is not riding on the fortunes of a particular company. 

Looking at a financial index can give investors a good idea of what the stock market is doing overall. They can use this to compare against individual investment performance.