Index investing: a solution to the dilemma
Instead of trying to select individual stocks and guess which company will succeed, index investing provides exposure to dozens, hundreds or even thousands of companies through a single investment. This page explains what a stock index is, introduces major indices in Israel and worldwide, and shows how they offer broader and simpler diversification alongside volatility and risks that are still important to understand.
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Now that we know the basic concepts, it is time to answer the big question: how do you choose what to invest in?
In the past, the only way to invest was to try to "guess" which companies would succeed and which would collapse, a difficult task that exposed investors to enormous risk. The most modern and efficient solution to this problem is index investingAn investment strategy based on tracking broad market indices over time, based on the assumption that it is difficult to consistently outperform the market..
Instead of putting all your eggs in one basket, investing in an index lets you buy a ready-made "basket" of dozens, hundreds or thousands of leading companies at once, with the click of a button. In this chapter, we will understand what an index is, get to know the main indices in Israel and around the world, and see how they let you benefit from the growth of the entire economy in a simple, diversified and calmer way.
What is a stock index?
A stock indexA virtual "basket" of shares grouped according to a certain criterion (such as market capitalization or industry), used to measure the performance of a specific market segment. is a tool that measures the performance of a particular group of stocks. Instead of tracking one company, the index gives a broader picture of an entire market or a specific sector.
The index consists of several companies selected according to specific criteria, such as market capitalization, industry or trading volume. Each company has a weight in the index, so larger companies affect it more.
- When the index rises
- On average, the companies included in it have increased in value.
- When the index falls
- It reflects an overall decline in the value of the companies in the index.
Stock indices are also a popular way to invest. Instead of trying to select individual stocks, you can invest in an entire index through exchange-traded fundsA security traded on an exchange that tracks a particular index, allowing an investor to buy a "basket" of assets in a single transaction. or index-tracking funds, gaining broad diversification across many companies.
Indices in Israel and around the world
There are many indices around the world, and each represents a different market or group of companies. Some provide broad exposure to the economy of a country or region, while others focus on a particular industry such as technology, real estate or banking.
Knowing the main indices helps you understand where your money is invested and the exposure you actually receive.
| Index | What it represents | Main characteristic |
|---|---|---|
| TA-35The flagship index of the Tel Aviv Stock Exchange, consisting of the 35 companies with the highest market capitalization traded in Israel. (ת״א 35) | The 35 largest companies on the Tel Aviv Stock Exchange, including companies in banking, real estate, energy and industry. | Provides exposure to the leading companies in the Israeli economy. Companies with a higher market capitalization have a greater effect on its performance. |
| S&P 500An index composed of 500 of the largest and leading companies traded on U.S. stock exchanges. | 500 of the largest companies in the United States, including Apple, Microsoft, Amazon, Google and Tesla. | Provides broad exposure to a range of sectors in the U.S. economy, such as technology, finance, healthcare and industry. |
| Nasdaq 100An index comprising the 100 largest non-financial companies listed on Nasdaq, with a strong emphasis on technology. | 100 of the largest companies traded on the Nasdaq stock exchange, including Apple, Meta and Nvidia. | Focuses on innovation and technology, so it may offer higher growth potential along with greater volatility. |
| ACWIA broad global index comprising thousands of shares from developed and emerging markets. | Thousands of companies from developed and emerging countries around the world. | Provides broad global diversification and reduces dependence on the economy of a single country. |
Growth stocks versus value stocks
Indices contain different types of companies:
| Stock type | Explanation |
|---|---|
| Growth stocks | Stocks of companies with high growth potential. Investors expect these companies to increase their profits substantially in the future, so they are willing to pay a relatively high price for them. Innovative technology companies are a prominent example. |
| Value stocks | Stocks of more stable companies with established operations and existing profits. They sometimes trade at a relatively low price compared with their true economic value. Well-known examples include companies such as Coca-Cola and McDonald's. |
Volatility in indices
Stock indices do not rise in a straight line. They are volatile and can sometimes fall sharply. Economic crises, interestThe "price of money" – the amount paid for the use of someone else’s money, as income to the depositor or as a cost to the borrower.-rate increases, geopolitical events or changes in market expectations can cause substantial short-term declines.
Frequently asked questions
If I invest in the S&P 500, is my money divided equally among all 500 companies?
No. Most of the world's leading indices are based on market capitalization. This means that the larger a company is, the greater its weight in the index. Giant companies such as Apple and Microsoft make up a significantly larger share of the index than the smaller companies near the bottom of the list of 500.
Does investing in a broad index such as ACWI protect me completely from losses?
No. Diversification reduces the risk of one company collapsing, but it does not eliminate volatility. A global investment protects you from a severe crisis in one particular country, such as a decline limited to the Israeli or U.S. market. However, during a global economic crisis, most markets around the world fall together, so a global index will also experience temporary declines in value.
Which is better to buy, growth stocks or value stocks?
There is no single correct answer, which is why indices include both. Growth stocks tend to lead and surge during periods of economic expansion and low interest rates, while stable value stocks often show greater resilience during recessions and inflation. Investing in a broad index saves you from having to guess which sector will win and lets you benefit from both worlds.
In summary
Stock indices make it possible to invest broadly and with diversification without choosing individual stocks: TA-35 represents the Israeli market, S&P 500 the U.S. economy, Nasdaq 100 the technology sector, and ACWI the entire world. Index investing provides excellent diversification, but it still involves market volatility. Understanding how indices work is an important step toward building a simple, efficient, long-term investment portfolio.