A comparison of three major stock indices: the NASDAQ Composite, Dow Jones Industrial Average, and S&P 500. All three have the same height at March 2007. Notice the large dot-com spike on the NASDAQ, a result of the large number of tech companies on that index.

A stock market index is a listing of stocks and a statistic reflecting the composite value of its components. It is used as a tool to represent the characteristics of its component stocks, all of which bear some commonality such as trading on the same stock market exchange, belonging to the same industry, or having similar market capitalizations. Many indices compiled by news or financial services firms are used to benchmark the performance of portfolios such as mutual funds. Image File history File links This is a lossless scalable vector image. ... Image File history File links This is a lossless scalable vector image. ... The Nasdaq Composite is a stock market index of all of the stocks listed on the NASDAQ stock market, meaning that it has over 3,000 components. ... The Dow Jones Industrial Average (DJIA) is one of several stock market indices created by Wall Street Journal editor and Dow Jones & Company founder Charles Dow. ... The S&P 500 is an index containing the stocks of 500 Large-Cap corporations, most of which are American. ... The dot-com bubble was a speculative bubble covering roughly 1995–2001 during which stock markets in Western nations saw their value increase rapidly from growth in the new Internet sector and related fields. ... A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. ... Market capitalization, often abbreviated to market cap, is a measurement of corporate size that refers to the current stock price times the number of outstanding shares. ... The definition of a mutual fund is a form of collective investment that pools money from many investors and invests their money in stocks, bonds, dividends, short-term money market instruments, and/or other securities. ...

Types of indices

Stock market indices may be classed in many ways. A broad-base index represents the performance of a whole stock market— and by proxy, reflects investor sentiment on the state of the economy. The most regularly quoted market indices are broad-base indices comprised of the stocks of large companies listed on a nation's largest stock exchanges, such as the American Dow Jones Industrial Average and S&P 500 Index, the British FTSE 100, the French CAC 40, the German DAX, the Japanese Nikkei 225 and the Hong Kong Hang Seng Index. The Dow Jones Industrial Average (NYSE: DJI, also called the DJIA, Dow 30, or informally the Dow industrials or The Dow) is one of several stock market indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. ... The S&P 500 is an index containing the stocks of 500 Large-Cap corporations, most of which are American. ... The FTSE 100 Index (pronounced footsie) is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange, begun on January 3, 1984. ... Price evolution of the CAC 40 between March 1, 1990 and February 1, 2005 The CAC 40, which takes its name from Paris Bourses early automation system Cotation Assistée en Continu (Continuous Assisted Quotation), is a French stock market index. ... DAX 30 chart in the Frankfurt Stock Exchange DAX 30 (Deutsche Aktien Xchange 30, former Deutscher Aktien-Index 30) is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. ... I LOVE U Nikkei 225 (日経平均株価, 日経225) is a stock market index for the Tokyo Stock Exchange (TSE). ... For other uses, see Hang Seng (disambiguation). ...

The concept may be extended well beyond an exchange. The Dow Jones Wilshire 5000 Total Stock Market Index, as its name implies, represents the stocks of nearly every publicly traded company in the United States, including all U.S. stocks traded on the New York Stock Exchange (but not ADRs) and most traded on the NASDAQ and American Stock Exchange. The Europe, Australia, and Far East Index (EAFE), published by Morgan Stanley Capital International, is a listing of large companies in developed economies in the Eastern Hemisphere. Russell Investment Group added to the family of indexes by launching the Russell Global 10000 which covers 80 countries and all stocks with a market capitalization greater than $200 million USD. The Dow Jones Wilshire 5000 Total Stock Market Index, also known as the Dow Jones Wilshire 5000 Composite Index or simply the Wilshire 5000 is a broad base stock market index often used to represent the entire United States stock market. ... The New York Stock Exchange (NYSE), nicknamed the Big Board, is a New York City-based stock exchange. ... ADR is a three-letter acronym that may refer to: Accord Dangereuse Routiers, regulations for the international movement of hazardous goods by road. ... NASDAQ in Times Square, New York City. ... The American Stock Exchange (AMEX) is an American stock exchange situated in New York. ... The MSCI EAFE Index is an index of foreign stocks. ... Morgan Stanley Capital International Inc. ... Downtown Tacoma - Russell Investment Group building, far right, building in the back, maroon and glass Russell Investment Group is an investment services company based in Tacoma, Washington. ...

More specialised indices exist tracking the performance of specific sectors of the market. The Morgan Stanley Biotech Index, for example, consists of 36 American firms in the biotechnology industry. Other indices may track companies of a certain size, a certain type of management, or even more specialized criteria— one index published by Linux Weekly News tracks stocks of companies that sell products and services based on the Linux operating environment. This article is 150 kilobytes or more in size. ... LWN.net is a computing news site with an emphasis on Free/Libre Open Source Software and software for Unix-like operating systems. ... Linux (IPA pronunciation: ) is a Unix-like computer operating system family. ...

Weighting

An index may also be classified according to the method used to determine its price. In a Price-weighted index such as the Dow Jones Industrial Average and the NYSE ARCA Tech 100 Index, the price of each component stock is the only consideration when determining the value of the index. Thus, price movement of even a single security will heavily influence the value of the index even though the dollar shift is less significant in a relatively highly valued issue, and moreover ignoring the relative size of the company as a whole. In contrast, a market-value weighted or capitalization-weighted index such as the Hang Seng Index factors in the size of the company. Thus, a relatively small shift in the price of a large company will heavily influence the value of the index. In a market-share weighted index, price is weighted relative to the number of shares, rather than their total value. This article needs to be wikified. ... The Dow Jones Industrial Average (NYSE: DJI, also called the DJIA, Dow 30, or informally the Dow industrials or The Dow) is one of several stock market indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. ... The NYSE Arca Tech 100 Index is a price-weighted index comprised of common stocks and ADRs of technology-related companies listed on US stock exchanges. ... A Market value-weighted index is an index whose components are weighted according to the total market value of their outstanding shares. ... A Market value-weighted index is an index whose components are weighted according to the total market value of their outstanding shares. ... For other uses, see Hang Seng (disambiguation). ...

Traditionally, capitalization- or share-weighted indices all had a full weighting i.e. all outstanding shares were included. Recently, many of them have changed to a float-adjusted weighting which helps indexing. The free float of a public company is an estimate of proportion of shares that are not held by large owners and that are not stock with sales restrictions (restricted stock that cannot be sold until they become unrestricted stock). ... An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. ...

Critique of Capitalisation-Weighting

The use of capitalisation-weighted indices is often justified by the central conclusion of modern portfolio theory that the optimal investment strategy for any investor is to hold the market portfolio, the capitalisation-weighted portfolio of all assets. However, empirical tests conclude that market indices are not efficient.^{[citation needed]} This can be explained by the fact that these indices do not include all assets or by the fact that the theory does not hold. The practical conclusion is that using capitalisation-weighted portfolios is not necessarily the optimal method.

As a consequence, capitalisation weighting has been subject to severe criticism (see e.g. Haugen and Baker 1991, Amenc, Goltz, and Le Sourd 2006, or Hsu 2006), pointing out that the mechanics of capitalisation weighting lead to trend-following strategies that provide an inefficient risk-return trade-off.

Also, while capitalisation weighting is the standard in equity index construction, different weighting schemes exist. First, while most indices use capitalisation weighting, additional criteria are often taken into account, such as sales/revenue and net income (see the “Guide to the Dow Jones Global Titan 50 Index”, January 2006). Second, as an answer to the critiques of capitalisation-weighting, equity indices with different weighting schemes have emerged, such as "wealth"-weighted (Morris, 1996), “fundamental”-weighted (Arnott, Hsu and Moore 2005), “diversity”-weighted (Fernholz, Garvy, and Hannon 1998) or equal-weighted indices. Fundamentally based indexes are indices in which stocks are weighted by a fundamental factor (e. ... Robert D. Arnott (b. ...

Indices and passive investment management

There has been an accelerating trend in recent decades to create passively managed mutual funds that are based on market indices, known as index funds. Advocates claim that index funds routinely beat a large majority of actively managed mutual funds; one study claimed that over time, the average actively managed fund has returned 1.8% less than the S&P 500 index. Since index funds attempt to replicate the holdings of an index, they obviate the need for— and thus many costs of— the research entailed in active management, and have a lower "churn" rate (the turnover of securities which lose favor and are sold, with the attendant cost of commissions and capital gains taxes). Passive management (also called passive investing) is a financial strategy in which a fund manager makes as few portfolio decisions as possible, in order to minimize transaction costs, including the incidence of capital gains tax. ... The definition of a mutual fund is a form of collective investment that pools money from many investors and invests their money in stocks, bonds, dividends, short-term money market instruments, and/or other securities. ... An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. ... Active management (also called active investing) refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming a benchmark index. ... The S&P 500 is an index containing the stocks of 500 Large-Cap corporations, most of which are American. ...

Indices are also a common basis for a related type of investment, the exchange-traded fund or ETF. Unlike an index fund, which is priced daily, an ETF is priced continuously, is optionable, and can be sold short. Exchange-traded funds (or ETFs) are open-ended collective investment schemes, traded as shares on most global stock exchanges. ...

Ethical stock market indices

A notable specialised index type is those for ethical investing indices that include only those companies satisfying ecological or social criteria, e.g. those of The Calvert Group, KLD, Dow Jones Sustainability Index and Wilderhill Clean Energy Index. Ethical investing, also known as Socially responsible investing or SRI attempts to ensure that invested funds are not used to violate the investors most basic moral values or ethical codes. ... The Calvert Social Index is a stock market index created by the Calvert Group as a benchmark of large companies that are considered socially responsible or ethical. ... The Domini 400 Social Index is a stock market index created by Amy Domini and others at KLD Research & Analytics, Inc. ...

Another important trend is strict mechanical criteria for inclusion and exclusion to prevent market manipulation, e.g. in Canada when Nortel was permitted to rise to over 50% of the TSE 300 index value. Ethical indices have a particular interest in mechanical criteria, seeking to avoid accusations of ideological bias in selection, and have pioneered techniques for inclusion and exclusion of stocks based on complex criteria. Another means of mechanical selection is mark-to-future methods that exploit scenarios produced by multiple analysts weighted according to probability, to determine which stocks have become too risky to hold in the index of concern. Northern Telecommunications Networks, commonly known as Nortel, is a telecommunications equipment manufacturer headquartered in Canada. ... This article needs to be wikified. ...

Critics of such initiatives argue that many firms satisfy mechanical "ethical criteria", e.g. regarding board composition or hiring practices, but fail to perform ethically with respect to shareholders, e.g. Enron. Indeed, the seeming "seal of approval" of an ethical index may put investors more at ease, enabling scams. One response to these criticisms is that trust in the corporate management, index criteria, fund or index manager, and securities regulator, can never be replaced by mechanical means, so "market transparency" and "disclosure" are the only long-term-effective paths to fair markets. Enron Creditors Recovery Corporation, formerly Enron Corporation, is a defunct America energy company based in Houston, Texas. ... In economics, a market is transparent if much is known by many about what products and/or services are available at what price and where. ... Disclosure means the giving out of information, either voluntarily or to be in compliance with legal regulations or workplace rules. ...

Environmental stock market indices

An environmental stock market index aims to provide a quantitative measure of the environmental damage caused by the companies in an index. Indices of this nature face much the same criticism as Ethical indices do - that, on some level, the 'score' given is subjective.

However, whereas 'ethical' issues (for example, does a company use a sweatshop) are largely subjective and difficult to score, an environmental impact is often quantifiable through scientific methods. So it is broadly possible to assign a 'score' to (say) the damage caused by a tonne of mercury dumped into a local river. It is harder to develop a scoring method that can compare different types of pollutant - for example does one hundred tonnes of carbon dioxide emitted to the air cause more or less damage (via climate change) than one tonne of mercury dumped in a river (and poisoning all the fish).

Generally, most environmental economists attempting to create an environmental index would attempt to quantify damage in monetary terms. So one tonne of carbon dioxide might cause $100 worth of damage, whereas one tonne of mercury might cause $50,000 (as it is highly toxic). Companies can therefore be given an 'environmental impact' score, based on the cost they impose on the environment. Quantification of damage in this nature is extremely difficult, as pollutants tend to be market externalities and so have no easily measurable cost by definition.

Innovations Awards to Stock Indexes

The list of the stock index winners of the William F. Sharpe Indexing Achievement Awards at the annual Super Bowl of Indexing Conference--

• Most Innovative Benchmark Index
  • 2004 - CBOE S&P 500 BuyWrite Index (BXM)
  • 2005 - FTSE/RAFI Fundamental Index Series
  • 2006 – Standard and Poor’s Case-Shiller House Prices Indices
• Most Innovative ETF
  • 2004 - iShares MSCI EAFE (EFA) and Emerging Markets
  • 2005 - EasyETF GSCI Commodities ETF
  • 2006 – PowerShares DB Commodity Index Tracking Fund (DBC) and PowerShares G10 Currency Harvest Fund (DBV)
• Most Innovative Index Derivative
  • 2004 - CBOE Volatility Index (VIX) Futures
  • 2005 - Options on Vanguard VIPERS at the CBOE
  • 2006 - Chicago Board Options Exchange Options on the CBOE Volatility Index (VIX)
• Best Index-related Research Paper
  • 2004 - Steven Schoenfeld
  • 2005 - Rob Arnott
  • 2006 – Eugene F. Fama and Kenneth R. French
• Lifetime Achievement Award
  • 2004 - Tim Harbert
  • 2005 - William Sharpe and Nathan Most
  • 2006 – Burton G. Malkiel and Ronald J. Ryan

The Chicago Board Options Exchange (CBOE) is one of the worlds largest options exchanges with an annual trade of over 15 billion shares of stock options in some 1200 companies. ... The S&P 500 is an index containing the stocks of 500 Large-Cap corporations, most of which are American. ... FTSE may stand for a number of things: FTSE 100 Index on the London Stock Exchange. ... Fundamentally based indexes are indices in which stocks are weighted by a fundamental factor (e. ... iShares is the brand name of the exchange-traded fund (ETF) family pioneered by Barclays Global Investors. ... The MSCI EAFE Index is an index of foreign stocks. ... The Chicago Board Options Exchange (CBOE) is one of the worlds largest options exchanges with an annual trade of over 15 billion shares of stock options in some 1200 companies. ... The Chicago Board Options Exchange (CBOE) is one of the worlds largest options exchanges with an annual trade of over 15 billion shares of stock options in some 1200 companies. ... The Chicago Board Options Exchange (CBOE), located at 400 South LaSalle Street in Chicago, is one of the worlds largest options exchanges with an annual trade of over 15 billion shares of stock options in more than 1200 companies, 50 stock indexes, and 50 exchange-traded funds (ETFs) [citation... VIX Index from inception to Jan. ...

See also

• List of stock market indices
• Dowism
• Exchange-traded fund
• Index (economics)
• Index fund
• Index investing
• Passive management

References

• Amenc, N., F. Goltz, and V. Le Sourd, 2006, “Assessing the Quality of Stock Market Indices”, EDHEC Publication
• Arnott, R.D., J. Hsu, and P. Moore, 2005, “Fundamental Indexation”, Financial Analysts Journal 60(2), 83-99.
• Fernholz, R., R. Garvy, and J. Hannon, 1998, “Diversity-Weighted Indexing”, Journal of Portfolio Management, 24(2), 74-82
• Haugen, R.A., and N.L. Baker, 1991, “The Efficient Market Inefficiency of Capitalization-Weighted Stock Portfolios”, Journal of Portfolio Management
• Hsu, Jason, 2006, “Cap-Weighted Portfolios are Sub-optimal Portfolios”, Journal of Investment Management, 4(3), 1-10

External links

• EDHEC recommends that institutional investors take greater care in the construction of their benchmarks