How Stock Indices Work

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Indonesia's President Joko Widodo said he is optimistic the country's stock index can reach 6,000 points, up about 8.6 percent from current levels, but did not give a time frame.
New York Times  Apr 4  Comment 
At least three-quarters of actively managed stock mutual funds regularly failed to beat the broad market index over three, five and 10 years.
Yahoo  Apr 3  Comment 
U.S. stock index futures fell sharply on Friday after a weaker-than-expected March employment report, in thin trading that nonetheless suggests a weak open for stocks on Monday. The jobs report, showing ...
MarketWatch  Apr 1  Comment 
The U.K.’s benchmark stock index started the new month and quarter in positive territory on Wednesday, boosted by a solid reading on the country’s manufacturing sector.
Yahoo  Mar 31  Comment 
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Yahoo  Mar 30  Comment 
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MarketWatch  Mar 30  Comment 
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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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