What Is a Stock Index (KOSPI, S&P 500)

A stock index is a representative indicator that bundles the prices of many stocks into a single number to show "whether the market as a whole is rising or falling."

Looking only at Samsung Electronics, you can't gauge the overall mood of the Korean stock market. So a stock index is created by putting representative stocks in one basket and turning their average movement into a number.

Think of KOSPI as the representative basket holding all companies listed on the securities market, and the S&P 500 as the basket holding about 500 large-cap U.S. stocks.

The base date of KOSPI is January 4, 1980. The total market capitalization on that day is set to "100," and the index shows how many times larger today's market cap is compared with then.

The formula is simple: (today's market cap ÷ the market cap on January 4, 1980) × 100. For example, if KOSPI is 2,500, it means the size of the whole market has become about 25 times the 1980 base.

This way of reflecting companies in proportion to their size (market cap) is called "market-cap weighting." That's why when a large company like Samsung Electronics moves, the index shakes greatly too.

The S&P 500 is an index holding about 500 representative large-cap stocks listed in the U.S. market (currently 503 constituents), covering about 80% of the U.S. stock market's capitalization. The current 500-stock system began in 1957.

Like KOSPI, the S&P 500 is proportional to market cap, but among these it uses "free-float market-cap weighting," which reflects only the shares actually available for trading in the market (free float).

It is commonly said that the base period is 1941–1943 and the base value is 10. However, these details are noted slightly differently across sources, so rather than the exact base value, it is safer to understand it as "an index that shows the relative change of a basket of large-cap stocks."

You must remember that a stock index is an "average." Even if the index rises, the stock you hold may fall; even if the index falls, some stocks rise. An index is not the report card of an individual stock.

Also, indices can fall sharply. Even the S&P 500 fell more than half from its peak during the 2008 financial crisis, and it took more than 4 years to recover the principal. Just because an index has risen over the long term does not mean the path was smooth.

So when looking at an index, you should look not only at "how much it rose" but also at "how much it fell along the way (maximum drawdown)."