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What is a stock market index?

A stock market index is a collection of different company stocks meant to represent a particular stock market or market sector. The Toronto Stock Exchange 300 Composite Index is an example. It's made up of 300 large Canadian companies that trade on the TSE. These stocks represent about a fifth of all stocks listed on that exchange.

When people say the TSE is up or down, generally they are referring to the TSE 300. If the index is rising or falling, you can expect most of the stocks on that stock market are moving in the same direction. If you say the U.S. stock market is up or down, you might be thinking of an index such as the Standard and Poor's 500 Index. The S&P 500 is made up of 500 stocks that are a broad cross-section of large U.S. companies. Stock indexes are used to measure the performance not only of the stock market itself, but also as a way to compare returns of various investments. So if you own individual stocks of large Canadian companies, you might want to see how well you are doing compared to an appropriate index -- such as the TSE 300. Similarly, if you held a mutual fund that invested in large Canadian companies, you might want to benchmark its performance against the TSE 300 to see if the fund manager has done better or worst than the index.