How Stock Indices Work

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U.S. stocks were setting up for a sharply higher open on Friday, following the first rate cut by China's central bank in more than two years.
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Nigeria's main share index fell for the third straight day on Thursday, shedding more than 3 percent in volatile trading as investors sold off relatively liquid consumer and oil stocks, dealers said.
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Indonesia's stock index rose as much as 0.7 percent in early trading on Tuesday, while the central bank called for an unscheduled meeting after the government announced an increase in fuel prices.
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Stocks may have technically made a fourth straight weekly gain last week, but the real story was the incredibly quiet, flat market action.  We'll delve into overall stock market index analysis, and some factors that have us concerned despite the...
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U.S. stock index futures were little changed on Friday, with the S&P on track for a fourth straight weekly advance, ahead of data on consumer sentiment.
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The main Indonesian stock index rose for a second session on Wednesday, led by shares of financial firms but uncertainty over the government's plan to raise fuel prices as a step towards cutting subsidy spending weighed on sentiment. Most other...
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In a statement reported by Reuters, MSCI announced that a Qatari listed company “Gulf International Services” will be added to the emerging market index. In its semiannual review announced last week, MSCI also increased the weights and removed...
Reuters  Nov 10  Comment 
U.S. stock index futures edged higher on Monday, after the Dow and S&P 500 advanced for a third straight week to fresh record highs.
The Hindu Business Line  Nov 10  Comment 
In an ideal situation, the stock indices should reflect the real economy




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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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