How stock indices work

The Hindu Business Line  Aug 26  Comment 
China will restrict trading in stock index futures in a bid to curb speculation, according to an exchange statement, after the futures contracts slumped by their 10 per cent daily limit for two co...
The Economic Times  Aug 25  Comment 
US stock index futures rose sharply on Tuesday, a day after Wall Street turned in its worst performance in four years.
Yahoo  Aug 25  Comment 
U.S. stock index futures pointed to a sharply higher open on Tuesday, recovering from the plunge seen in global stocks on Monday.  Aug 25  Comment 
CANBERA (dpa-AFX) - Asian stock markets have rebounded on Tuesday from early losses, as a rise in U.S. stock index futures during Asian trades helped soothe investor sentiment and ignore further falls on China's stock market. The Chinese...
Financial Times  Aug 24  Comment 
Dollar also a major casualty as US stock indices dive
The Times of India  Aug 24  Comment 
Tokyo's benchmark stock index dropped more than four percent to finish at a six-month low on Monday, swept lower in a global equities rout as worries about China's economy deepen.
Yahoo  Aug 21  Comment 
U.S. stock index futures were pointing to another lower open on Friday, with Dow futures down as much as 88 points.
Market Intelligence Center  Aug 19  Comment 
A covered call identified by's patented algorithm on Vanguard Extended Market Index ETF (VXF) could yield about 2.37% (7.14% annualized, for comparison purposes only) in 121 days. Pair a long position in the ETF with a...
Yahoo  Aug 18  Comment 
U.S. stock index futures pointed to a lower open on Tuesday, following another sharp sell-off in Chinese stocks over yuan concerns, as investors awaited some key earnings and July's Federal Reserve minutes....


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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