How Stock Indices Work

The Economic Times  Sep 15  Comment 
Nikkei stock index rose 0.6 per cent as investors awaited the outcome of the BoJ's two-day policy meeting later this session, as well as BOJ Governor Haruhiko Kuroda's post-meeting speech.
Yahoo  Sep 11  Comment 
U.S. stock index futures indicated a lower open on Friday with traders cautious about next week's meeting of the U.S. Federal Reserve.
Reuters  Sep 7  Comment 
China's stocks regulator said it plans to deepen reforms and bolster supervision of the market, including looking into a stock index "circuit breaker" system that would halt trading in response to substantial drops.
The Australian  Sep 4  Comment 
The exodus of commodity-linked companies from benchmark stock indices tracked by fund managers is gathering pace.
Yahoo  Sep 3  Comment 
U.S. stock index futures indicated a higher open on Thursday, building on Wednesday's rally which saw major averages gain more than 1.5 percent.
Yahoo  Aug 31  Comment 
U.S. stock index futures pointed to a lower open on Monday, as European and Asian stocks traded mostly lower on concerns that Beijing might change tack in its efforts to boost the stock market.
MarketWatch  Aug 28  Comment 
The Russell 2000 index of small-capitalization stocks is the latest major market index to catch the “death cross” virus, that has also spread to mid-cap and large-cap indexes.
Reuters  Aug 28  Comment 
U.S. stock index futures fell on Friday, after a two-day market rally, suggesting nervousness heading into the weekend after a hair-raising ride for global markets in the past few days.
Yahoo  Aug 28  Comment 
U.S. stock index futures fell early on Friday, as the rocky ride in global markets continued.
The Economic Times  Aug 28  Comment 
China Financial Futures Exchange will take further steps to curb excessive speculation in stock index futures trading.


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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