How Stock Indices Work

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Jutia Group  Oct 10  Comment 
In these pages, I have been very critical about stock buybacks by companies on the key stock indices. I see them as nothing more than a form of financial engineering used to manipulate per-share corporate earningsā€¦and a bad investment for the...
SeekingAlpha  Oct 9  Comment 
By Invest Up: TRADE SUMMARY Stay long the German stock market. The BUY rating was issued at 6932.58 on 9/04/2012. The BUY rating has already helped investors generate potential gains of 31.92%. Our target return is 25.71%. ...
Financial Times  Oct 9  Comment 
US stock indices all down by more than 1%
Market Intelligence Center  Oct 7  Comment 
After Monday's trading in Vanguard Extended Market Index ETF (VXF) the algorithms behind MarketIntelligenceCenter.com's Artifical Intelligence Center picked out a trade that offers a 2.99% or 14.75% (for comparison purposes only), while providing...
SeekingAlpha  Oct 5  Comment 
By Invest Up: TRADE SUMMARY - Stay long the French stock market (ETF: EWQ). - The BUY rating was issued at 3513.28 on 8/21/2012. - The BUY rating has already helped investors receive potential returns of 28.76%. - Our target return is...
newratings.com  Oct 3  Comment 
BRUSSELS (dpa-AFX) - Following the release of U.S. ISM non-manufacturing composite index for September at 10:00 am ET Friday, the greenback advanced further against the other major currencies. The greenback was trading at 109.72 against the yen,...
SeekingAlpha  Oct 1  Comment 
By Marc Chandler: This Great Graphic, created on Bloomberg, shows the performance of the MSCI World Index (white line), which, despite its name, does not include emerging markets. It also shows the MSCI Emerging Market Index (yellow line). ...
SeekingAlpha  Oct 1  Comment 
By Reuben Sushman: The Global X SuperIncome Preferred ETF (NYSEARCA:SPFF), according to Global X funds: Seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P...
The Hindu Business Line  Oct 1  Comment 
US stock index futures pointed to a lower open on Wednesday, as caution arose following the first diagnosis of a patient in the United States with Ebola. While drug companies with Ebola t...




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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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