How Stock Indices Work

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Reuters  Jun 28  Comment 
U.S. stock index futures rose slightly on Thursday, after China approved a U.S. chipmaker deal and Accenture posted strong results, but uncertainty about Washington's trade stance with China weighed on the mood.
Channel News Asia  Jun 27  Comment 
U.S. stock index futures slid on Wednesday on concerns that a worsening U.S.-China trade relationship could disrupt businesses and hurt corporate profits.
Reuters  Jun 27  Comment 
U.S. stock index futures were nearly flat on Wednesday, pulling back from sharp losses earlier, after the Trump administration softened its stance on restricting foreign investments.
Channel News Asia  Jun 27  Comment 
U.S. stock index futures slid on Wednesday on concerns that a worsening U.S.-China trade relationship could disrupt businesses and hurt corporate profits.
Reuters  Jun 26  Comment 
U.S. stock index futures held steady on Tuesday, a day after the S&P 500 posted its steepest one-day loss since early April on fears of a spiraling trade dispute between the United States and other major economies.
Channel News Asia  Jun 25  Comment 
REUTERS: U.S. stock index futures fell on Monday as growing trade tensions between the United States and China kept investors on edge, with the latest threat involving a check on Chinese investments in U.S. technology firms. The S&P 500 mini...
Reuters  Jun 21  Comment 
Stock index provider MSCI said on Thursday it extended its review of how to treat stocks with unequal voting rights and expects to make a decision by the end of October.
The Economic Times  Jun 21  Comment 
MSCI's Asia ex-Japan stock index was weaker by 0.66 per cent, while Japan's Nikkei index closed up 0.61 per cent.
Channel News Asia  Jun 20  Comment 
REUTERS: U.S. stock index futures rose on Wednesday, after a punishing few sessions for Wall Street due to a rapid escalation in trade tensions between the United States and China. World stocks also steadied near three-week lows and Chinese...




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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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