How stock indices work

MarketWatch  Jun 30  Comment 
U.S. house prices rose 1.1% in April, supported by the spring sales market, with gains in all the cities tracked by the Case-Shiller 20-city composite index released Tuesday. With seasonal adjustment, prices rose 0.3%, the report said. Home prices...  Jun 26  Comment 
A 7.4% drop Friday puts mainland China's main stock index close to bear market territory.
The Hindu Business Line  Jun 24  Comment 
US stock index futures were lower on Wednesday after
Wall Street Journal  Jun 21  Comment 
Even after a slump last week, China’s benchmark stock index has more than doubled in the past year, but there is no sign that investors are splurging with their profits to help the sagging economy.
The Hindu Business Line  Jun 17  Comment 
State Bank of India’s Composite Index (CI) lost momentum in June, indicating moderate growth as against high growth in the previous month. The CI, which is an indicator of manufacturing...
The Hindu Business Line  Jun 15  Comment 
Saudi Arabia’s bourse gave up early gains and turned slightly negative on Monday after modest trading volumes indicated there were no significant fund inflows from abroad on the first day that the...
MarketWatch  Jun 15  Comment 
About 10 hours ahead of the start of U.S. stock trading in New York, share-index futures were implying a lower open for Monday. Futures for the Dow Jones Industrial Average , S&P 500 and Nasdaq 100 implied a 0.5% drop for each index when the...
The Hindu Business Line  Jun 10  Comment 
Indian investors could begin the trading session with some cheer on Wednesday morning as MSCI has postponed the decision to include China’s A shares in to its emerging market index. With...
Wall Street Journal  Jun 9  Comment 
China is closer to joining MSCI’s widely tracked Emerging Markets Index in the latest sign of progress for a nation that has been pushing to change the openness and transparency of its markets.


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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