How Stock Indices Work

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Yahoo  Jun 27  Comment 
US stock index futures pointed to a lower start to trade, as European stocks and currencies declined following the U.K. vote to leave the EU.
Reuters  Jun 26  Comment 
U.S. stock index futures eased slightly in early trading on Sunday after Britain's vote to leave the European Union sparked a sharp sell-off in global markets on Friday, wiping out over $2 trillion from world equities.
The Hindu Business Line  Jun 26  Comment 
The variation in returns between the fund and its corresponding benchmark, usually a market index, is referred to as tracking error (TE). Given that tracking error gives investors a sense of how vola...
Yahoo  Jun 23  Comment 
U.S. stock index futures indicated a higher open on Thursday morning as traders eyed the release of several pieces of data.
The Economic Times  Jun 23  Comment 
Some say it may lead to the end of the EU itself. This has created a fertile ground for fear mongering on Dalal Street with stock indices going wobbly.
Motley Fool  Jun 23  Comment 
A stock index helps investors track the overall performance of a group of stocks over time.
Yahoo  Jun 20  Comment 
U.S. stock index futures indicated a higher open Monday as global markets rallied on Brexit polls that showed the remain camp making gains.
Yahoo  Jun 17  Comment 
U.S. stock index futures indicated a lower open on Friday morning.
The Economic Times  Jun 15  Comment 
MSCI said it decided not to add local Chinese shares to its key emerging market index as Beijing had more work to do in liberalising capital markets.
newratings.com  Jun 15  Comment 
VIENNA (dpa-AFX) - Stock index futures point to a higher start on Wednesday as investors brace for the Federal Reserve's policy decision later in the day. Policymakers are widely expected to leave the central bank's 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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