How Stock Indices Work

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Reuters  Aug 18  Comment 
U.S. and European stock prices surged on Monday, taking a leading U.S. equities index to a 14-year high, as investors breathed easier over the Ukraine crisis and knocked oil prices to lows not seen in more than a year.
The Economic Times  Aug 18  Comment 
The HSI index was down 0.5 per cent at 24,838.4 points, with the China share sub-component underperforming to lose nearly 1 per cent.
The Economic Times  Aug 17  Comment 
MSCI increased the weightings of three Qatari companies in its emerging market index, citing changes in the way Qatar calculates ceilings on foreign ownership of its firms.
Financial Times  Aug 15  Comment 
US benchmark stock indices responded to the jump in volatility by reversing earlier gains
Bloomberg  Aug 14  Comment 
Asian Stock Index Heads for Best Weekly Gain Since March Asian stocks rose, with the regional index headed for its best weekly rally since March, as investors weighed...
The Economic Times  Aug 13  Comment 
The FTSEurofirst 300 index of top European shares was up 0.4 per cent, with MSCI's world stock index up 0.6 per cent.
Reuters  Aug 13  Comment 
The Thai index rose to a two-week high on Wednesday while most other Southeast Asian markets were slightly firmer as cautious investors awaited cues on the global economy. Thailand's main stock index jumped 1.3 percent to its highest intra-day...
Yahoo  Aug 12  Comment 
Bob Doll, chief equity strategist at Nuveen Capital Management says he firmly believes the broader market index will come within striking distance of 2,000 by the end of this year.




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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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