Stock Market Index

From Financial Literacy Wiki

A stock market index is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used as benchmarks, to measure the performance of portfolios such as mutual funds/units trust or stocks.

Generally the stocks used for the computation of the stock index are those that can reflect the general sentiments of the section in analysis. These stocks should also be the most liquid of the section as it is believed that higher liquidity means that the prices would reflect clearly the investors sentiment of the section in analysis since prices and/or volume traded of these stocks are used to calculate the stock market index.

Alternatively, an index may also be considered as an instrument (after all it can be traded) which derives its value from other instruments or indices. The index may be weighted to reflect the market capitalization of its components, or may be a simple index which merely represents the net change in the prices of the underlying instruments.