How Stock Indices Work

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NEW YORK (TheStreet) -- Since the low made last year, the Shanghai Stock Exchange Composite Index, the premier benchmark for Chinese equities, has almost doubled in price. Unfortunately for new investors who are just starting to look for...
Yahoo  Mar 26  Comment 
U.S. stock index futures indicated a sharply lower open on Thursday, with Dow futures tumbling 130 points after stocks plunged to close over 1 percent lower Wednesday.
The Straits Times  Mar 25  Comment 
March 26, 2015 2:27 AM GAINS in several blue chips and large-cap stocks helped lift local shares to a three-week high and hold the stock index above the 3,400-point level.
The Hindu Business Line  Mar 23  Comment 
Saudi Arabia’s stock market moved little in early trade on Monday as oil prices fell, while Egypt dropped after construction firms complained that fuel shortages were delaying their projects.
Yahoo  Mar 18  Comment 
U.S. stock index futures indicated a flat to lower open on Wednesday ahead of the hotly anticipated statement from the Federal Reserve.
The Hindu Business Line  Mar 17  Comment 
A key China stock index rose closed at its highest in almost seven years, with investors pushing it through a psychological resistance level on hopes the market has resumed a bull run that began l...
The Hindu Business Line  Mar 17  Comment 
The SBI Composite Index, an indicator for tracking India’s manufacturing activity, has shown a significant growth in output both in terms of month-on-month and yearly basis in March. The mo...
Forbes  Mar 13  Comment 
All three major U.S. stock indices finished trading Friday in the red.
Reuters  Mar 12  Comment 
U.S. stock index futures pointed to a modestly higher open on Thursday as a surprise drop in retail sales pointed to a consumer that continued to struggle, but also eased some concern about how soon the Federal Reserve may raise interest rates.
Reuters  Mar 12  Comment 
U.S. stock index futures edged higher on Thursday, suggesting a partial rebound following a string of declines, as investors looked ahead to data for indications of how soon the Federal Reserve is likely to raise interest rates.


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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