A benchmark is a standard reference point against which performance of an asset/ investment/ variable/ position/ instrument/ holding is measured or compared. Broadly speaking, a benchmark is a yardstick used for comparison. For a portfolio, a standard measure that establishes a minimal or optimal level against which the allocation, risk, and return of a given portfolio is analyzed or evaluated. A benchmark is a baseline, that is used for comparative purposes when evaluating the performance of a portfolio, collection of assets (baskets), mutual funds or broadly an investment.

In financial markets, indexes are benchmarks to which the performance of individual securities is related. In addition to benchmarks representing broad market or specific sector characteristics, such as large-cap index, mid-cap index, small-cap index, growth, and value, market participants usually resort to indexes based on fundamental characteristics, industry, sectors, market trends, earnings and dividends, etc.

Benchmark may come in many forms including: benchmark prices, benchmark rates, benchmark performance, benchmark instrument, benchmark return, benchmark deposit rate, etc.

On the other hand, an index (indice) is a numeric score that measures and tracks the characteristics and performance of the broader market or specific markets or asset classes. It is constructed by a market player (e.g., exchanges, financial markets, etc.) and is typically market cap weighted, as the index components are weighted according to the total market cap or market value of all the securities that are represented.

An index can also be perceived as a tool designed to reflect the performance of a market or a subset of a market or sector. An index indicates a change in published prices of a select collection of assets or securities. An example is an index complied out of the prices of securities over time. Another interesting example is the so-called consumer price index (CPI), which is a published figure of general price level that reflects the change in prices paid by consumers for goods and services (usually a select basket of goods and services) over time.

A stock market index is a list of securities whose prices are compiled according to a specific methodology in such a way as to represent the broader market in terms of general performance and direction, day to day and over time.

In short, an index constitutes a number calculated by reference to a select collection of assets (e.g., financial assets: stocks, bonds, derivatives), investments, and market indicators (of a certain market variable) whose absolute level or periodic difference is derived from the performance of the collection over a given period and generally over time.

In everyday practice, the terms “index” and “benchmark” are often used interchangeably, but each implies it specific meaning and context. An index is a consistently ordered set of components that are handpicked from a broader universe to provide an overall picture about exposure to specific industries, sectors or geographies. An index can be “broad market” (such as the S&P 500), or a customized index that is compiled using specific construction rules (e.g., a strategic or thematic beta index).

Given the conceptually and practically different initiation and uses, it can be generalized that each index is necessarily a benchmark, whereas benchmarks are not always indexes. Market players have more liberty to use various types of benchmarks, including indexes, to address their referencing requirements. Indexes, in other words, are more specific and focused, and always provide official readings of market reality for specific types of exposure.