How Stock Indices Work

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U.S. stock index futures indicated a lower open on Friday morning.
Motley Fool  Jun 15  Comment 
When you buy the Vanguard Total Stock Market Index you become an owner of practically every stock that trades on American stock exchanges.
The Economic Times  Jun 15  Comment 
MSCI said it decided not to add local Chinese shares to its key emerging market index as Beijing had more work to do in liberalising capital markets.
newratings.com  Jun 15  Comment 
VIENNA (dpa-AFX) - Stock index futures point to a higher start on Wednesday as investors brace for the Federal Reserve's policy decision later in the day. Policymakers are widely expected to leave the central bank's benchmark...
Yahoo  Jun 13  Comment 
U.S. stock index futures indicated a lower open as investors looked ahead to crucial central bank decisions from the U.S. and Japan this week.
Financial Times  Jun 12  Comment 
18 stock indices — dubbed BUKs — aim to undercut the lucrative market position of LSE
Clusterstock  Jun 12  Comment 
NEW YORK (Reuters) - U.S. stock index futures were lower in early trading, indicating Wall Street may open with losses on Monday, the first trading day after the worst mass shooting in U.S. history. S&P e-mini futures were down 0.27 percent at...
New York Times  Jun 12  Comment 
The Worldwide Developers Conference is scheduled in San Francisco and China awaits a decision that could add its domestic shares to a major global stock index.
The Economic Times  Jun 10  Comment 
Speculation are that MSCI will have China’s mainland shares, which may squeeze weightage of countries like India and spark outflows by foreign investors.
Motley Fool  Jun 9  Comment 
This Vanguard fund gives you the opportunity to buy a diversified basket of virtually every single publicly-traded company outside the United States.




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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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