How stock indices work

Financial Times  Apr 25  Comment 
Crude’s rebound fades and drags back equities
Benzinga  Apr 21  Comment 
A new analysis shows that there are both signals and noises in asset markets, Stuart Reid wrote on Turing Finance. Reid "developed a 'meta test' for market randomness tests based on greedy lossless compression algorithms which indicate that such...
Reuters  Apr 21  Comment 
REUTERS - U.S. stock index futures were little changed on Thursday as oil prices steadied and investors braced for a barrage of earnings reports that could provide fresh catalysts to drive the market.
The Economic Times  Apr 21  Comment 
Brazil's stock index has returned 23% to investors in 2016. Global commodities crash and scandal at Petrobras in 2015, brought the country to its knees.
Yahoo  Apr 20  Comment 
U.S. stock index futures indicated a flat open with investors digesting the results of the New York primaries.
The Hindu Business Line  Apr 20  Comment 
Oil prices rose on Tuesday following a workers' strike in Kuwait, while a global stock index hit its highest level since early December as signs of economic stabilisation in China lifted the demand f...
The Economic Times  Apr 19  Comment 
Nikkei stock index was up 3.4% in early trading, a day after it plunged by that same percentage as investors assessed the impact of earthquakes in japan.
MarketWatch  Apr 15  Comment 
The failure of most mutual fund managers to beat a benchmark stock index evidently isn’t their fault. Their bosses hold them back.
MarketWatch  Apr 14  Comment 
Stock-fund managers could beat a benchmark index if fund companies didn’t get in the way, writes Chuck Jaffe.


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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