How Stock Indices Work

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Channel News Asia  Jul 14  Comment 
U.S. stock index futures were little changed on Friday as investors awaited key data for a reading on the health of the economy while JPMorgan kicked off second-quarter earnings.
Channel News Asia  Jul 13  Comment 
U.S. stock index futures were higher on Thursday, a day after Federal Reserve Chair Janet Yellen's dovish stand on interest rates allayed investor fears of a tighter monetary policy.
Channel News Asia  Jul 12  Comment 
U.S. stock index futures were higher on Wednesday ahead of Federal Reserve Chair Janet Yellen's testimony to Congress.
Channel News Asia  Jul 12  Comment 
U.S. stock index futures were higher on Wednesday ahead of Federal Reserve Chair Janet Yellen's testimony to Congress.
The Economic Times  Jul 10  Comment 
Markets have netted the highest ever inflows in the first half of any year since 2010. FPI and domestic MF have pumped over Rs 95K crore into markets since Jan.
Channel News Asia  Jul 10  Comment 
U.S. stock index futures were slightly higher on Monday as the latest jobs report increased optimism that a tightening labor market would keep the Federal Reserve on course for a third rate hike this year despite benign inflation.
Channel News Asia  Jul 7  Comment 
U.S. stock index futures were little changed on Friday, with the June non-farm payrolls data firmly on investors' minds amid rising expectations of tighter monetary policy.
The Times of India  Jul 4  Comment 
While the indices are still fairly flat, the fall is significant given the Sensex had surged by more than 300 points on Monday. The loss is attributed to weak Asian cues due to a missile launch by North Korea.
Benzinga  Jul 3  Comment 
With cannabis legalization across multiple states in the U.S. and other countries around the world, there’s been an explosion of research firms looking into the industry. ArcView Market Research became famous for its market-size predictions,...
Channel News Asia  Jul 3  Comment 
U.S. stock index futures were higher on Monday, with all three major indexes on track to begin the third quarter on a positive note.




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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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