How Stock Indices Work

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MarketWatch  11 min ago  Comment 
The U.K.’s main stock index jumped on Wednesday as the benchmark got a boost from a weaker currency amid lingering concerns about the country’s exit from Europe’s trade bloc.
Channel News Asia  1 hr ago  Comment 
U.S. stock index futures were flat on Wednesday, as escalating trade tensions between the United States and China overshadowed a strong showing for corporate earnings.
Reuters  Aug 3  Comment 
U.S. stock index futures gave up early gains to trade flat on Friday after data showed U.S. job growth slowed more than expected in July.
Channel News Asia  Aug 2  Comment 
Technology and industrial companies pushed U.S. stock index futures lower on Thursday, as fears of a trade spat between the United States and China failed to let up after President Donald Trump proposed 25 percent tariffs on US$200 billion worth...
Channel News Asia  Jul 31  Comment 
U.S. stock index futures edged higher on Tuesday, with technology stocks looking to bounce back after a widespread sell-off in the earlier session on rising concerns about the future growth of high-flying companies.
Yahoo  Jul 30  Comment 
U.S. stock index futures dipped late on Sunday ahead of a week when more than 140 S&P 500 companies, including Apple Inc, will report earnings. At 9:07 p.m., S&P 500 e-minis were down 0.18 percent, Dow ...
Channel News Asia  Jul 25  Comment 
Disappointing reports from Boeing and General Motors pushed U.S. stock index futures lower on Wednesday, ahead of a closely watched meeting between President Trump and European Union officials on trade.
Channel News Asia  Jul 25  Comment 
Disappointing reports from Boeing and General Motors pushed U.S. stock index futures lower on Wednesday, ahead of a closely watched meeting between President Trump and European Union officials on trade.
Channel News Asia  Jul 24  Comment 
U.S. stock index futures rose on Tuesday, as Alphabet's strong results lifted other high-growth technology companies, adding to a robust earnings season in the backdrop of a U.S.-China trade war and a strengthening dollar.




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A stock index is generally a portfolio of stocks, bonds or other kinds of investments which are used to represent either segments of an exchange or the whole exchange. One of the most common ways to understand a stock index is to have a look at the composition of the stocks it represents. Generally, the set of rules require the stocks to satisfy certain criteria, such that[1]:

  • All the investments in the index are subject to selection.
  • Includes calculations and rules for weighting of the index components.
  • Provides specific instructions for adjustments to maintain consistency.

How Stock Market Indexes are classified

The benchmark indices of various exchanges not only represent the stocks, but the scenario of the market as a whole. Hence, they are used to depict the overall health of the economy as well. Understanding how the index works, is a good way to begin analysis on various stocks and their importance to the economy. A good way to analyze an index is to understand the composition of the stocks it represents.

A broad based index or composite index is the one which covers almost all stocks on the exchange (or a certain majority percentage of the market capitalization on the exchange). The main purpose of the broad based index is to act as a proxy for the performance of the economic conditions of the entire market, or reveal investor sentiment towards the market.

Based on the definition of a stock index, a global index could include indices which span across exchanges and possibly countries. The Dow Jones Wilshire 5000 Total Stock Market Index spans all publicly traded index in America, excluding foreign stocks and ADRs. The Euronext 100 includes stocks from all over the European Union and the Russell Investment group have something called the Global Index.


References

<Broby, D., "Equity Index Construction", The Journal of Index Investing, Fall 2011, Vol. 2, No. 2: pp. 36-39 />

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