How Stock Indices Work

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The Economic Times  Jan 6  Comment 
EM stock index fell 1 % to a 3-week low as a 3.6 % drop in Saudi stocks, and a 4.2 % drop in Russian stocks led the fastest oil-related bleed.
The Economic Times  Jan 6  Comment 
Brent crude touched a fresh 5-1/2-year low at $52.28 a barrel on oversupply concerns. MSCI's emerging market index was down 0.9%.
Wall Street Journal  Jan 6  Comment 
Stock index provider MSCI rejected activist investor ValueAct Capital Management LP’s request to join its board, ValueAct said, bucking a trend in which companies have lately succumbed to such overtures.
Clusterstock  Dec 31  Comment 
By Ryan Vlastelica NEW YORK (Reuters) - U.S. stock index futures edged higher on Wednesday, suggesting Wall Street would end a strong year with minor gains, though the seasonal trend of modest moves and low volume looked set to...
Clusterstock  Dec 30  Comment 
By Ryan Vlastelica NEW YORK (Reuters) - U.S. stock index futures were slightly lower on Tuesday, suggesting the market's recent trend of slight moves and low volume would continue in the final trading days of the year. (Editing by W...
Clusterstock  Dec 29  Comment 
By Ryan Vlastelica NEW YORK (Reuters) - U.S. stock index futures were slightly lower on Monday, as investors found few reasons to keep pushing shares higher following a sharp rally that has taken major indexes to repeated records. (Editing by...
Yahoo  Dec 29  Comment 
U.S. stock index futures signaled a softer open, as European stocks traded lower after elections in Greece failed to secure a new president.
WA Business News  Dec 22  Comment 
The S&P 500 stock index has risen to fresh records, another positive day for global equity markets still cheered by last week's US Federal Reserve meeting.
The Economic Times  Dec 18  Comment 
Turkey's main stock index was up almost 1.92 per cent at 82,369.73 points, outperforming the emerging market index which was up 1.6 per cent.
Yahoo  Dec 18  Comment 
U.S. stock index futures signaled a sharply higher open on Thursday, as Wall Street cheered comments from Federal Reserve Chair Janet Yellen.




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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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