How stock indices work

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Bloomberg  Apr 12  Comment 
Euro Drops After Draghi Comments; U.S. Stock Futures Fall The euro dropped as European Central Bank President Mario Draghi said a further appreciation would trigger more...
Bloomberg  Apr 12  Comment 
Euro Drops After Draghi Comments; U.S. Stock Futures Fall The euro dropped as European Central Bank President Mario Draghi said a further appreciation would trigger more...
The Economic Times  Apr 11  Comment 
The yield on US 30-year Treasury bonds fell to its lowest level since last summer on growing losses in US stock index futures, stoking safety bids.
Bloomberg  Apr 11  Comment 
Asia’s benchmark stock index fell from near the highest closing level in almost three months as a selloff of U.S. technology shares resumed and after the yen rose, dragging Japanese shares lower.
The Economic Times  Apr 9  Comment 
About half the total demat account holders have exited the stock market in the past few years. Of 2.1-cr demat a/cs, nearly 1.1-cr are inactive.
USAToday.com  Apr 7  Comment 
Stocks appeared likely to carry Friday's losing ways into the new week as major market index futures dropped.
FX Street  Apr 4  Comment 
US stock index futures are slightly higher ahead of the March jobs report, due at 13:30 BST (08:30... For more information, read our latest forex news and reports.
Reuters  Apr 4  Comment 
U.S. stock index futures advanced modestly on Friday, putting the S&P 500 on track to hold near its record high, ahead of the monthly payrolls report.     




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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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