How Stock Indices Work

MarketWatch  Mar 19  Comment 
A sharp drop in technology stocks on Monday was threatening to push the Nasdaq Composite Index beneath a closely watched short-term trend line. The Nasdaq was off 2.6% in recent trade at 7,286, with a drop below its 50-day moving average at...
Channel News Asia  Mar 16  Comment 
U.S. stock index futures pointed to a flat opening for Wall Street on Friday as continuing turmoil in the Trump administration kept investors on edge.
Channel News Asia  Mar 15  Comment 
U.S. stock index futures pointed to a flat opening for Wall Street on Thursday as fears that President Donald Trump's decision to impose fresh tariffs on China may escalate into a trade war weighed on the markets.
Channel News Asia  Mar 14  Comment 
U.S. stock index futures signaled a rebound for Wall Street on Wednesday, a day after the main indexes fell more than half a percent on fears of political and trade uncertainties.
Channel News Asia  Mar 13  Comment 
U.S. stock index futures were slightly higher on Tuesday ahead of the consumer prices data, which will provide the last crucial reading on inflation in the run up to a near-certain interest rate hike by the Federal Reserve next week.
Reuters  Mar 13  Comment 
U.S. stock index futures trimmed early gains on Tuesday after U.S. President Donald Trump ousted Secretary of State Rex Tillerson.
WA Business News  Mar 13  Comment 
Australian shares have barely moved at the open of trade, following a mixed lead from Wall Street's major stock indices and falls in commodities.
Channel News Asia  Mar 12  Comment 
U.S. stock index futures pointed to a higher opening for Wall Street on Monday, building on gains from last week's strong February jobs data that allayed fears of rising inflation and faster interest rate hikes.
The Hindu Business Line  Mar 12  Comment 
Hong Kong's benchmark stock index rose nearly 2 per cent to its highest closing level in five weeks on Monday, as fears of a global trade war, and faster US rate hikes eased. The rally was


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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