How Stock Indices Work

RECENT NEWS  7 hrs ago  Comment 
Major market index futures were lower ahead of the Labor Department's monthly jobs report Thurday, which could trigger an interest rate hike...
Yahoo  Nov 5  Comment 
U.S. stock index futures indicated a higher open on Thursday as traders looked to Friday's key employment report.
Yahoo  Nov 4  Comment 
U.S. stock index futures pointed to a higher open Wednesday, ahead of the bulk of the day's comments from Fed policymakers and economic data.
The Economic Times  Nov 3  Comment 
The S&P 500 stock index has rallied nearly 13 percent from its Aug. 25 low, while the small-cap Russell 2000 has advanced just 7.5 percent in that time.
Forbes  Oct 31  Comment 
The major U.S. stock indices need to clear their Spring 2015 highs in order for a Santa Claus rally to become a reality.
The Economic Times  Oct 22  Comment 
MSCI's overall emerging market index fell 0.3 per cent in its third straight session in the red after a broad sell-off in Asian bourses.
Yahoo  Oct 22  Comment 
U.S. stock index futures pointed to a sharply higher open on Thursday.
Yahoo  Oct 21  Comment 
U.S. stock index futures indicated a slightly higher open on Wednesday, with investor's looking to Ferrari NV's first day of trading and a fresh slew of corporate earnings reports.
Yahoo  Oct 16  Comment 
U.S. stock index futures indicated a flat to slightly higher open, with traders keenly anticipating the release of a range of economic data.


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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