How Stock Indices Work

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News.com.au  8 hrs ago  Comment 
THE Australian market looks set to open higher, after the S&P 500 stock index in the US closed above 2,000 points for the first time.
Gold Stocks Today  Aug 26  Comment 
The Dow is really testing the mettle of the bears. That includes me. As of today the rally has reached a height of 17124. Just shy of the all time high of 17151. So, is that the end of the rally? I wish I could say it was but there is s...
Reuters  Aug 25  Comment 
The U.S. S&P 500 stock index broke through the landmark 2,000 level on Monday, marking a six-year rally which has benefited many Americans from Wall Street to Main Street.
Bloomberg  Aug 25  Comment 
Asian Stock Index Little Changed as Valuations Climb Asian stocks were little changed after valuations on the regional benchmark index climbed to the highest level this year.
Clusterstock  Aug 24  Comment 
During her remarks at Jackson Hole on Friday, Federal Reserve Chair Janet Yellen referenced a "labor market conditions index from 19 labor market indicators." The Fed first wrote about it on May 22. "This broadly based metric supports the...
New York Times  Aug 22  Comment 
The exchange also confirmed its plans to raise about $1.6 billion to help fund its $2.7 billion acquisition of Russell Investments, the owner of the Russell 2000 stock market index.
Reuters  Aug 18  Comment 
U.S. and European stock prices surged on Monday, taking a leading U.S. equities index to a 14-year high, as investors breathed easier over the Ukraine crisis and knocked oil prices to lows not seen in more than a year.
The Economic Times  Aug 18  Comment 
The HSI index was down 0.5 per cent at 24,838.4 points, with the China share sub-component underperforming to lose nearly 1 per cent.




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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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