How Stock Indices Work

The Economic Times  May 20  Comment 
Exposure of most large offshore funds is the highest ever and even more than the weights that emerging market stock indices give India.
The Economic Times  May 20  Comment 
Indonesia's key stock index hit a near four-week closing high while Thai construction shares gained after the government unveiled plans on projects.
The Economic Times  May 15  Comment 
India’s valuation premium to MSCI EM Index has dropped to the lowest level in 7 years after the 10% correction in the domestic stock market from the recent highs.
Market Intelligence Center  May 14  Comment 
For a hedged play on Vanguard Extended Market Index ETF (VXF)'s patented trade-picking algorithms recommend the Sep. '15 $91.00 covered call for a net debit in the $88.20 area. That is also the break-even price for the...
The Economic Times  May 11  Comment 
Turnover in CSI300 stock index futures, launched in April 2010 on the China Financial Futures Exchange, have rocketed in recent weeks.  May 5  Comment 
BRUSSELS (dpa-AFX) - The Institute of Supply management's non-manufacturing composite index for April is to be released at 10:00 am ET Tuesday. Economists forecast a reading of 56.2 in April, compared to 56.5 seen in March. Following the...
Reuters  May 4  Comment 
U.S. stock index futures were higher on Monday ahead of data that is expected to show demand for U.S. manufactured goods rose in March, sending factory orders up and signaling that the sector is strengthening despite a stronger dollar.
The Hindu Business Line  May 4  Comment 
Southeast Asian shares mostly traded mixed on Monday, with Indonesia and the Philippines rebounding after a recent bout of weakness. Indonesia stock index rose 1.3 per cent after losing...
Reuters  Apr 29  Comment 
U.S. stock index futures were lower on Wednesday as investors await the outcome of the two-day Federal Reserve meeting and ahead of U.S. economic growth numbers for the first quarter.


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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