A
stock market index or stock index is a list of stocks and figures, which represents the composite value of its constituents. The stock market index is utilized as a device for representing the features of its constituent stocks.
The financial services providers and news agencies perform the compilation of a large number of stock market indexes and they are implemented for benchmarking the performance level of various investment portfolios, which also include mutual funds.
The component stocks of a stock index carry some similarities, which include the following:
Most of the times they belong to the same industry
They carry similar market capitalization values
They are traded on the same stock exchange
The stock market indices can be categorized into the following types:
- Price weighted index
- Market value weighted index or capitalization weighted index
- Market share weighted index
- Ethical investing index
- Broad based index: It includes the Dow Jones Industrial Average Index, the S&P 500 Stock Index, the FTSE 100 Index (London Stock Exchange), DAX Index (Frankfurt Stock Exchange), CAC 40 Index (Paris Stock Exchange), the Nikkei 225 Index (Tokyo Stock Exchange), and the Hang Seng Index (Hong Kong Stock Exchange).
- Environment stock market indices
The classification of stock market indexes are based on their characteristics and functions. They are also classified on the basis of industries under which the particular company is falling, for example, electronics index, energy index, metal index, finance index, and water index.
The broad based index is the most frequently quoted stock market index and it consists of the stocks of multinational companies (MNCs) that are listed on the main stock exchange of a country. The weighting process of the stock market index is performed on the basis of the know-how that is applied for calculating its price.
The principal stock market indexes of the world include the following:
- The Dow Jones Industrial Average Index
- The NASDAQ Composite Index
- The S&P 500 Stock Index
- BSE Stock Index (Sensex)
- NSE Stock Index
- Hang Seng Stock Index
- Nikkei Stock Index
Recently, an increasing trend is seen for creation of passively managed mutual funds on the basis of stock market indices and they are termed as index funds. The pricing of these funds is done on a daily basis.