A lot of talk in the popular financial press is about the “index,” and, specifically, who can beat it and who can’t. This is particularly the case on both CNBC and Bloomberg, and there are two reasons for it. For one, for a retail investor focused on retirement, low-cost index funds are almost always the best bet, especially if the time horizon is long. For another, there is selection bias among the people who want to talk on CNBC and Bloomberg: money managers who, for the most part, are measured against an index and, very often, tend to lose against the index.

Finance is much more complicated and diverse than this, however. In reality, a lot of finance is not about “beating the index” but about finding correlations and using them for a particular financial goal. For instance, a bank that has a very large loan to an airline which is itself dependent upon the price of oil for its profitability will want to offset that exposure with loans to companies that are not dependent upon oil for profitability at all—that is, the bank will want to seek exposure to uncorrelated industries to ensure its loan portfolio is robust and will not fail.

This doesn’t mean that indexes aren’t valuable outside of the retail investor-focused money management world, but it does mean that indexes serve very different purposes in different contexts. Which leads us to the question: what exactly is an index?

All an index is is a benchmark with which to compare other things. If, for instance, a new stock goes up or down an average of 3% per day, I would want to know whether that’s a lot or a little. The only way to do so would be to create an index of other stocks that go up and down and compare the new one to that index. This can not only tell me if the movement is unusual, but how much it is unusual. In effect, I am creating an arbitrary correlation to make things measurable in the same way that a centimeter or a foot or a degree celsius is an arbitrary measurement that can be used to express the value of something.

Because of their multiply uses as a comparative tool, and because finance depends on correlations and ratios to make sense of trends and developments, there are many cases where an analyst will need to find a specific index for his purposes. This is why, over time, thousands upon thousands of indexes have been created to serve different purposes, and most of the time analysts will find an index that is “good enough” for their specific need at the time. But in many cases, the analyst will need to go further and create their own index.

This is not hard, but it does involve some knowledge of statistics and preferably a few pairs of eyes to spot errors and faults in the indexes. But what is important is understanding that, at the end of the day, all an index is is a barometer used to answer a basic question—it is not a golden standard or a holy proclamation, as it can often feel from the popular press’s obsession with the S&P 500 and, even worse, the Dow Jones Industrial Average. These, after all, are simply indexes whose rules were created and modified arbitrarily over time to give investors a way to understand how equities are trending—nothing more, nothing less. And they should be treated as such, even if they often are not.