How stock indices work

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Yahoo  Aug 31  Comment 
U.S. stock index futures pointed to a lower open on Monday, as European and Asian stocks traded mostly lower on concerns that Beijing might change tack in its efforts to boost the stock market.
MarketWatch  Aug 28  Comment 
The Russell 2000 index of small-capitalization stocks is the latest major market index to catch the “death cross” virus, that has also spread to mid-cap and large-cap indexes.
Reuters  Aug 28  Comment 
U.S. stock index futures fell on Friday, after a two-day market rally, suggesting nervousness heading into the weekend after a hair-raising ride for global markets in the past few days.
Yahoo  Aug 28  Comment 
U.S. stock index futures fell early on Friday, as the rocky ride in global markets continued.
The Economic Times  Aug 28  Comment 
China Financial Futures Exchange will take further steps to curb excessive speculation in stock index futures trading.
Yahoo  Aug 27  Comment 
U.S. stock index futures pointed to a sharply higher open Thursday, with the Dow indicating gains of nearly 200 points at the open, following the stellar close seen on Wednesday.
Japan Today  Aug 27  Comment 
China's key stock market index surged 5.3 percent Thursday, its biggest gain in eight weeks, as markets across Asia rose following Wall Street's rebound, giving investors some relief after gut-wrenching global losses. The Shanghai Composite...
The Hindu Business Line  Aug 27  Comment 
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.




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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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