How Stock Indices Work

The Times of India  May 18  Comment 
Tokyo, May 18, 2016 (AFP) -Tokyo's benchmark share index closed marginally lower Wednesday, ending a two-day winning streak as better-than-expected Japanese GDP data cooled chances of the central bank unleashing more stimulus. The world's number...
The Economic Times  May 16  Comment 
In Riyadh, Saudi Kayan gained 0.7 percent and Sahara Petrochemical was up 1.3 percent. The Saudi stock index rose 0.4 percent in the first half-hour.
Motley Fool  May 14  Comment 
The Vanguard Total Stock Market Index Fund is an excellent way to invest in stocks without doing much homework.
Reuters  May 13  Comment 
As the anniversary of the S&P 500's high mark approaches, the benchmark U.S. stock index's latest rally has stalled and failed to breach a key level, prompting some calls for sell-offs, at least in the short term.
The Economic Times  May 13  Comment 
The MSCI Emerging Market index has formed a Golden Cross for the first time in a year, reflecting the possibility of a sharp upward movement for the market.
The Economic Times  May 12  Comment 
Hong Kong's benchmark stock index fell to a 10-week closing low on Thursday, following a dismal day on Wall Street.
Clusterstock  May 9  Comment 
China's benchmark Shanghai Composite stock index is tanking on Monday after disappointing economic data. The Shanghai Composite closed down 2.77% at a two-month low:The slide comes after data over the weekend showed that Chinese exports declined...
The Hindu Business Line  May 4  Comment 
China stocks closed roughly flat on Wednesday, as the Shanghai market came under pressure near key technical resistance and after signs of subdued manufacturing activity. The CSI300 index of the la...
The Economic Times  May 4  Comment 
The CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 0.1 percent, to 3,209.46.
Yahoo  May 4  Comment 
U.S. stock index futures traded lower early Wednesday, following declines overseas and ahead of earnings and amid U.S. 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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