A Market Makers article from IIA member Nasdaq reviews the basic “ingredients” that are needed to create a financial index.

The article, “Ingredients for Index Construction,” was written by Nasdaq Chief Economist Phil Mackintosh and Nasdaq Head of Americas Index Product Development Robert Jankiewicz.

It is a primer on the index industry, giving a 360-degree view of what it takes to create and maintain a financial index, as well as how financial indexes impact investors.

The piece from Mackintosh and Jankiewicz reviews key questions such as the difference between an index and an index fund, how indexes are built, index methodology, when index funds trade, weighting of indexes, why indexes need to be rebalanced, and how different indexes compare to each other.

Mackintosh and Jankiewicz write that indexes aren’t just important for index funds.

“By creating a virtual portfolio that represents the ‘market’ (or a specific style of sector), they also establish a ‘typical’ return and risk level that active mutual funds can be benchmarked to,” wrote the authors.

For more information, read the full complete article on Nasdaq’s website.