A stock exchange index captures the behavior of an overall equity market. Therefore, different indices are used as information sources. By looking at an index, one can know how the overall market is doing.
Different investors hold different portfolios of stocks. An index is a lead indicator of how the overall portfolio would perform. An index also serves as a benchmark for measuring the performance of fund managers.
Indices reflect the changing expectations of the stock market about future dividends of the corporate sector. When an index moves up, the stock market thinks that the performance of the companies comprising the index will be good. Similarly, when the market feels that the performance of companies consisting of an index might not be suitable in the future, then an index value may drop.