How Stock Indices Work

RECENT NEWS
The Economic Times  Mar 27  Comment 
The depressed mood looked set to continue on Wall Street, with U.S. stock index futures falling 1 percent to a six-week low.
The Economic Times  Mar 27  Comment 
US stock index futures fell 0.7 per cent to a six-week low in heavy volume, suggesting a weaker start on Wall Street later in the day.
MarketWatch  Mar 22  Comment 
A new stock index is made up of 50 companies that get the lion’s share of their revenues from the U.K. -- and it’s underperforming.
The Economic Times  Mar 20  Comment 
The stock slipped by Rs 8 or 0.67 per cent to Rs 1,292 in morning trade following the transaction. The broader market index, Sensex, was trading nearly 150 points down at 29,506.
The Economic Times  Mar 16  Comment 
Amid the record-setting spree, the market capitalisation of BSElisted firms spiked to a lifetime high of Rs 120 lakh crore. The Sensex gained 0.6% to 29,585.85 points.
Benzinga  Mar 15  Comment 
June SP500 is trading at 2367.50, up 4.50. June Nasdaq 100 is trading at 5394.00, up 8.50. June Russell 2000 is trading at 1366.30, up 5.10. June Dow Industrial futures are trading at 20834, up 31. Stock index futures are trading higher...
Clusterstock  Mar 14  Comment 
Canopy Growth, a marijuana-growing company based in Ontario, is being added to the S&P/TSX composite index, The Globe and Mail reports. The company will be added to the index's healthcare sector and start trading on March 20. Shares were down...
Benzinga  Mar 14  Comment 
June SP500 is trading at 2361.25, down 10.50. June Nasdaq 100 is trading at 5382.50, down 16.75. June Russell 2000 is trading at 1362.40, down 7.00. June Dow Industrial futures are trading at 20804, down 39. Stock index futures are...
Benzinga  Mar 13  Comment 
June SP500 is trading at 2367.75, down 0.75. June Nasdaq 100 is trading at 5393.75, up 7.25. June Russell 2000 is trading at 1367.30, up 4.40. June Dow Industrial futures are trading at 20834, down 14. Stock index futures are trading...
Benzinga  Mar 13  Comment 
Benzinga  Mar 10  Comment 
June SP500 is trading at 2372.50, up 9.75 June Nasdaq 100 is trading at 5394.75, up 24.00. June Russell 2000 is trading at 1366.50, up 7.80. June Dow Industrial futures are trading at 20880, up 52. Stock index futures are trading choppy...




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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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