How Stock Indices Work

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Yahoo  Aug 13  Comment 
U.S. stock index futures indicated a higher open on Thursday as markets turned to a raft of U.S. data set to be released.
Market Intelligence Center  Aug 10  Comment 
Vanguard Extended Market Index ETF (VXF) presents a trading opportunity that offers a 2.48% return in just 130 days. A covered call on Vanguard Extended Market Index ETF at the $90.00 level expiring on Dec. '15 offers an assigned return rate of...
Forbes  Aug 8  Comment 
The sharply higher opening last Wednesday spooked those who were short the market and encouraged the bulls to buy more especially in the market leading Nasdaq 100. The euphoria was short lived as the market dropped sharply Thursday and closed weak...
Yahoo  Aug 7  Comment 
U.S. stock index futures were lower on Friday as investors digested the latest release of U.S. jobs data.
Market Intelligence Center  Aug 7  Comment 
A covered call identified by MarketIntelligececenter.com's patented algorithm on Vanguard Extended Market Index ETF (VXF) could yield about 2.53% (6.94% annualized, for comparison purposes only) in 133 days. Pair a long position in the ETF with a...
newratings.com  Aug 5  Comment 
BRUSSELS (dpa-AFX) - The U.S. ISM non-manufacturing composite index for July is due at 10:00 am ET Wednesday. Before the data, the greenback showed mixed trading against the other major currencies. While the greenback rose against the yen, it held...
Yahoo  Aug 5  Comment 
U.S. stock index futures extended gains after a voting member of the Fed said on CNBC that nothing is decided on raising rates in September.
MarketWatch  Aug 4  Comment 
The U.K.’s benchmark stock index ends a choppy session slightly down on Tuesday, with shares of Shire pulling the average lower, while miners push higher on the back of higher metals prices.
The Economic Times  Aug 4  Comment 
Greek blue-chip stock index futures opened down on Tuesday, with the nearest contract ATFQ5 expiring on August 21 falling 1.02 per cent.
Financial Times  Aug 4  Comment 
Addition would be blow to reputation of GPIF-favoured showcase stock index as a governance benchmark




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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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