Indices

November 23, 2010Investingby EconomyWatch

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Stock market indices are tools to measure the performance of a section of the stock market. These indices help investors determine whether to buy or sell securities. Indices are also used by financial news providers to benchmark the performance of portfolios. Examples of US stock market indices are the Dow Jones Industrial Average (DJIA), S&P 500 CompositeStock Price Index and the NYSE Composite Index.

Types of Indices

There are several types of stock market indices, based on the industry, size, management team of companies or other specialized criteria. There are broad-based stock indices that represent the overall stock market, which also mirrors investorsentiments in the economy. Here, stocks of large companies are listed on prominent stock exchanges, such as the Dow Jones Industrial Average, the Hong Kong Hang Seng Index and the French CAC 40. Examples of industry-specific indices are the MorganStanley Biotech Index and Linux Weekly News.

Another classification of indices is based on their weighting. Weighting refers to the method used to determine the price of anindex. Different types of weighting include price-based, capitalization-based, modified market cap-based and attribute-based weighting.

There are specialized stock market indices as well. These include ethical stock market indices and environmental stock marketindices. While ethical stock market indices comprise companies that fulfill certain ecological or social standards, environmental indices provide information on environmental damage caused by companies.

Indices and Versions

Sometimes indices have several versions. For instance, the S&P 500 index has three versions, namely price return, total return and net total return. Similarly, the Wilshire 4500 has five versions. Versions are created to take into account differences in thecalculation of dividends and the weighting of index components.

Indices are also the basis for passive investments, such as index funds and exchange-traded funds (ETF). The difference lies intheir pricing, option ability and selling.

Awards to Stock Indices

Every year, innovations in the indexing industry are recognized through the William F. Sharpe Indexing Achievement Awards. Popular award categories include the “Most Innovative benchmark Index” and “Lifetime Achievement Awards".

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