What is a Total Market Index?

A total market index is a compilation of publicly traded companies with equity offerings listed on the major stock exchanges of a particular country. The weighted performance of the list is used as a benchmark by the financial industry to track the risk and returns of an entire market. Various financial companies, such as Standard and Poor’s (S&P), publish a total market index to enable investors and financial analysts to make investment decisions and evaluate the performance of a stock portfolio or mutual fund against the performance of the market as a whole.

Most every country’s stock market has a total market index that is compiled and published by one or more financial services companies. The index typically includes all or almost all of the publicly traded companies that are based in that country, issue stock, and are listed on the country’s major stock exchanges. For example, the Russell/Nomura Total Market Index includes data from 98 percent of the companies listed on Japan’s stock exchange. Since a total market index evaluates the performance of an entire market, it is often cited as an indication of investor confidence in the country’s economy.

In the U.S., the Wilshire 5000 and the S&P Total Market Index are two of the most widely referenced total market indexes. A public company is included in the index if the company is U.S.-based, issues stock, and is listed on the New York, American, or NASDAQ stock exchanges. All companies included in the index are not treated the same in the composite value analysis, however. The contribution of each listed company to the overall price of the index is weighted, so certain companies have more of an influence on the fluctuating price of the index than other companies do.

An index can choose a wide variety of methods of weighting included companies to determine the overall price of the index. A standard total market index typically uses a market capitalization paradigm that gives more weight to larger companies that hold the most market share. For instance, 500 of the largest companies out of over 6,000 companies listed on the Wilshire 5000 comprise over 70 percent of the total value of the index. The Wilshire 5000, as well as other total market indexes, come in multiple versions that use different weighting methodologies, including price-weighted, float-adjusted, and equal weight, that differ based on how stocks and dividends are treated in the valuation.