How Stock Indices Work

The Hindu Business Line  Jun 5  Comment 
MSCI world tech stock index climbs 0.7% to new record high
Financial Times  Jun 5  Comment 
Shares add to 2018 rally on news social media group will be added to the S&P 500
MarketWatch  Jun 5  Comment 
A gauge built on stock index options prices highlights when sophisticated investors are risk averse owing to worries over the economy.
Channel News Asia  Jun 1  Comment 
U.S. stock index futures rose on Friday as Italy's political crisis subsided although prospects of a full-blown trade war between the United States and its top allies continued to loom over the markets.
MarketWatch  Jun 1  Comment 
U.S. stock index futures remained higher after President Donald Trump said on Twitter that he is "looking forward" to May employment figures due at 8:30 a.m. Eastern. S&P 500 index futures were up 13.25 points, or 0.5%, to 2,718.75, while Dow...
Channel News Asia  May 31  Comment 
U.S. stock index futures were trading flat on Thursday as optimism over Italy trying to avoid a snap election was hampered by worries of a looming trade war with the European Union.
Reuters  May 29  Comment 
U.S. stock index futures pointed to a lower open on Tuesday as investors switched cash into perceived safe havens of global financial markets due to a deepening political crisis in Italy.
Channel News Asia  May 23  Comment 
U.S. stock index futures were lower on Wednesday on fresh uncertainty over U.S.-China trade talks and ahead of a Federal Reserve report that would be watched for cues on pace of future interest rate hikes.
Reuters  Apr 16  Comment 
U.S. stock index futures rose on Monday as investors bet the weekend's U.S.-led missile attack on Syria would not escalate into a broader conflict, while turning their focus to the earnings season.
Reuters  Apr 13  Comment 
U.S. stock index futures rose more than half a percent on Friday after a trio of big banks reported strong quarterly results, while geopolitical risks and concerns over trade war eased.


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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