Stock indices track and measure particular baskets of related stocks. With thousands of stocks trading on the various major exchanges, indices provide an accurate and efficient way for investors to reliably track overall market sentiment as well as to benchmark against their individual stocks portfolios.

The advantage of trading indices over individual stocks, and using them in passive investment strategies, is that they offer exposure to an entire industry. Investors do not have to perform thorough research on individual company reports; they only need to take a bullish or bearish position, depending on the overall market sentiment. The price movement of indices is also a lot smoother as no one individual stock can induce an extreme price spike. This naturally makes index trading less volatile.

Still, due to the amount of activity that takes place on individual stocks, indices offer sufficient volatility for traders to pick out numerous profitable trading opportunities. This is especially true for day traders and news-based price action followers since indices often reflect the broad economic effects of both political and economic shifts.

For risk-averse and longer-term traders, index investing allows for easy and effective diversification. Instead of investing in just a few stocks, where risk is multiplied, index-based ETFs offer exposure to the entire stock market, while simultaneously reducing the risk of a single company negatively impacting your entire trading portfolio.