As we have seen, stock indices are a form of market indicator. On a day to day basis, indices reflect the overall buying/selling decisions for the market/sector they represent. And market reaction to major news and economic items is reflected in index movements. 

This provides investors with a quick indication of how the market as a whole is reacting to events in the ‘real world’; which, in turn, is likely to be reflected in the the market value of their portfolio. 

As well as being a market indicator indices provide a useful benchmark for comparisons.

They frequently used as a basis for comparing the performance of investment funds. And an index can also be used for comparison against individual shares, on the basis of p/e ratio or volatility.

The wide range of indices available also makes more specific comparisons possible. For example, an electricity company - here, Powergen, represented by the blue line - could be compared to the electricity sector index as a whole - represented by the green line. 

Market indices can also be used for historical analysis. By analysing market indices and other indicators, you may be able to detect relationships or patterns which can be useful in terms of trading decisions. This form of analysis is known as technical analysis. 

And securities market indices can form the basis for what are known as passive investment strategies, the aim of which are to replicate the performance of a particular index. Here so-called tracker funds invest in a diversified portfolio representative of an index in order to match its performance. 

Finally, derivatives markets use indices as the basis for pricing index futures and options contracts. These contracts are based on the expected value of the index at a future date. Index derivatives are increasingly being used for portfolio insurance and speculation, as they give access to an index price movement without having to buy the underlying stocks themselves.