How Stock Indices Work

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Channel News Asia  Jun 13  Comment 
REUTERS: U.S. stock index futures were lower on Monday, with Nasdaq futures taking the biggest hit as investors locked in gains on the richly-valued technology sector. Technology stocks have been enjoying a record-setting rally, helped largely by...
Motley Fool  Jun 11  Comment 
Looking for index funds? Vanguard Total International Stock Index Fund, Vanguard Short-Term Bond ETF, and Vanguard 500 Index FundĀ are three great options to consider!
Benzinga  Jun 5  Comment 
The "Trump Rally" has made many investors richer, and as the major stock indices are trading near historical all-time highs, now is the right time to cash in on the profitable investments, right? Not necessarily, at least according to...
Channel News Asia  May 31  Comment 
U.S. stock index futures were little changed on Wednesday, pressured by weak oil prices, with investors looking for fresh catalysts to trade on.
Channel News Asia  May 31  Comment 
Channel News Asia  May 31  Comment 
U.S. stock index futures were little changed on Wednesday, pressured by weak oil prices, with investors looking for fresh catalysts to trade on.
The Economic Times  May 29  Comment 
Saudi Arabia's stock index dropped to 6,783 points on Sunday, falling below technical support at 6,826-27 points.
Channel News Asia  May 26  Comment 
NEW YORK: Wall Street drifted marginally higher to new records on Friday despite finishing virtually flat ahead of a holiday weekend. With the three major stock indices clinging to advances made in a week-long rally, Friday's hair's-breadth gains...
Motley Fool  May 18  Comment 
Investing in an index fund or ETF is a great choice. Now you just need to figure out which index to use.
The Economic Times  May 15  Comment 
Their rising influence is evident from the kind of insulation they have provided to the market recently, offsetting bulk outflows by foreign portfolio investors (FPIs).
Channel News Asia  May 9  Comment 
U.S. stock index futures rose on Tuesday as a favorable French election outcome and a robust first-quarter earnings season improved appetite for risk.




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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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