How Stock Indices Work

The Economic Times  Jul 14  Comment 
Future contracts tracking China's key stock indexes fell sharply in early afternoon trading on Tuesday.
The Hindu Business Line  Jul 14  Comment 
China's key share indexes fell on Tuesday, following three days of rebound, as a sharp correction in blue chips offset gains in small caps. But there were few signs of panic selling - the...
Reuters  Jul 13  Comment 
About a week after Shanghai's main stock index broke above 4,000 points in April, the leading newspaper of China's ruling Communist Party weighed in with patriotic glee.
Forbes  Jul 12  Comment 
A technical analysis of China's main stock indices.  Jul 10  Comment 
WASHINGTON (dpa-AFX) - U.S. stocks are seen edging higher at the open on Friday as confidence slowly creeps back into global equity and commodity markets. While doubts remain about the efficacy of Beijing's aggressive rescue efforts...
The Australian  Jul 10  Comment 
The Economic Times  Jul 9  Comment 
China's benchmark Shanghai stock index cut losses and gained over 2 per cent after falling 3.7 percent on Thursday morning.  Jul 6  Comment 
BRUSSELS (dpa-AFX) - The U.S. ISM non-manufacturing composite index for June has been released at 10:00 am ET Monday. Following the data, the greenback traded mixed against its major rivals. While the greenback declined against the pound and the...
Market Intelligence Center  Jul 6  Comment 
After Thursday's trading in Vanguard Extended Market Index ETF (VXF) the algorithms behind's Artifical Intelligence Center picked out a trade that offers a 2.45% or 12.08% (for comparison purposes only), while...  Jul 6  Comment 
Stock markets in the country rise by by nearly 8% before slipping back as Beijing attempts to prevent more massive losses Emergency intervention by the Chinese government appeared to partially stabilise its plunging stock markets on Monday with...


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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