How stock indices work

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The Hindu Business Line  Mar 4  Comment 
Composite index too shows marginal improvement
Reuters  Mar 3  Comment 
U.S. stock index futures edged lower on Tuesday, after the Dow and S&P marched to new record highs and the Nasdaq topped the 5,000 mark for the first time in 15 years.
Reuters  Mar 3  Comment 
The key Thai stock index hit a near 6-week closing low on Tuesday as index heavyweight PTT traded ex-dividend while the Philippine main index came off highs after Philippine Long Distance Telephone (PLDT) retreated after a weak earnings guidance....
MarketWatch  Mar 2  Comment 
Fewer but bigger companies dominate the tech-heavy index these days, and valuations aren’t as sky-high.
MarketWatch  Mar 2  Comment 
There’s nothing to fear as the Nasdaq 100 stock index nears a record high, according to Tim Mullaney, who says the Nasdaq is built on a foundation of solid companies.
MarketWatch  Feb 27  Comment 
Fewer but bigger companies dominate the tech-heavy index these days, and valuations aren’t as sky-high.
Market Intelligence Center  Feb 26  Comment 
While the spotlight has been on Janet Yellen this week, this morning traders are turning their attention to China. In Shanghai, stocks rocketed higher with the composite index gaining 2.14% overnight. Calls for additional monetary stimulus/easing...
Reuters  Feb 26  Comment 
U.S. stock index futures were little changed on Thursday ahead of a flurry of economic data, after the Dow edged up to a new record a day earlier while the Nasdaq snapped a 10-session winning streak.
MarketWatch  Feb 25  Comment 
The Dow Jones Transportation Average is out of sync with other benchmarks, says Mark Hulbert.




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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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