5. Introducing The Index Tracker

An index tracker is essentially a cheap, simple investment fund that mimics the performance of the stock market. But, in order to understand how they work, it's useful to know a little bit about stock market indices.

An index is a method of tracking how well a stock market, or a particular sector of it, is performing. It enables investors to assess how well they are doing, by comparing their own performance against it. They can see if they are outperforming (doing better than the index) or underperforming (doing worse). Each index is made up of many different companies. The level of the index is calculated by taking an average of all its constituent companies' share prices.