How Stock Indices Work

Yahoo  Jun 3  Comment 
Bill Gross, who in April said a bet against German bunds is the “short of a lifetime,” said the next new opportunity is wagering against Chinese stocks.  Jun 3  Comment 
BRUSSELS (dpa-AFX) - The U.S. ISM non-manufacturing composite index for May was released at 10:00 am ET Wednesday. The greenback dropped against the other major currencies after the data. The greenback was trading at 1.1235 against the euro,...
The Hindu Business Line  Jun 3  Comment 
Qatar’s stock index tumbled 2.8 per cent to a six-week low in early trade on Wednesday after Sepp Blatter unexpectedly resigned as the president of soccer’s world governing body FIFA. Doh...
Yahoo  Jun 2  Comment 
U.S. stock index futures declined on Tuesday, ahead of reports on U.S. auto sales and April factory orders.
The Economic Times  May 30  Comment 
CFFEX has completed preparations to launch stock index options, Vice President of the exchange Lu Dongsheng said at a financial forum on Friday, newspaper said.  May 29  Comment 
WASHINGTON (dpa-AFX) - Stock index futures indicate a lower open for Wall Street shares on Friday, as investors look ahead to the release of some key data for further clues on the economy and the rate trajectory. Global cues remain lackluster,...  May 28  Comment 
Mainland China's major stock index plunged 6.5% today. What caused it? What does it mean?
BBC News  May 27  Comment 
The US Nasdaq stock index rallied to a record after technology and healthcare stocks advanced.
The Straits Times  May 26  Comment 
May 27, 2015 1:15 AM SINGAPORE blue chips failed to find a reason to play yesterday, with the key market index muddling about in a 10-point band on both sides of the previous close.
MarketWatch  May 26  Comment 
U.S. house prices rose 0.9% in March to take the year-on-year advance to 5%, according to the S&P/Case-Shiller 20-city composite index released Tuesday. With seasonal adjustment, prices were up by 1%, the report said. Nineteen of the 20 cities...


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.


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

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