How stock indices work

Market Intelligence Center  8 hrs ago  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  11 hrs ago  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.
Yahoo  Feb 25  Comment 
U.S. stock index futures signaled a flat open on Wednesday after comments from Fed Chair Yellen's speech to Congress which hinted the central bank was not in a rush to hike rates.
Wall Street Journal  Feb 24  Comment 
The U.K.’s flagship stock index climbed to close at an all-time high, 15 years after its previous peak at the height of the dot-com boom.
Market Intelligence Center  Feb 24  Comment 
Vanguard Extended Market Index ETF (VXF) presents a trading opportunity that offers a 2.99% return in just 115 days. A covered call on Vanguard Extended Market Index ETF at the $91.00 level expiring on Jun. '15 offers an assigned return rate of...
Reuters  Feb 24  Comment 
U.S. stock index futures were little changed on Tuesday, with the Dow and S&P 500 holding near record levels ahead of testimony by Federal Reserve Chair Janet Yellen and a flurry of economic data.
The Hindu Business Line  Feb 18  Comment 
The Indonesian key stock index rallied to a record high on Wednesday amid optimism about the domestic economy after an unexpected rate cut by the central bank, while Malaysian shares snapped three...
The Times of India  Feb 17  Comment 
The SBI composite index, an indicator for tracking India's manufacturing activity, has registered a month-on-month decline in February.


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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