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 including the largest listed companies on a nation's largest stock exchange, such as the American Dow Jones Industrial Average and S&P 500 Index, the British FTSE 100 , the French CAC 40 , the German DAX and the Japanese Nikkei 225 .
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 stocks traded on the New York Stock Exchange 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.
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.
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 , 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.
Traditionally, capitalization- or share-weighted indices all had a ''full'' weighting i.e. all outstanding shares where included. Recently, many of them have changed to a '' Float -adjusted'' weighting which helps Indexing .
There has been an accelerating trend in recent decades to create Passively Managed Mutual Fund s that are based on market indices, known as Index Fund s. 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).
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.
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 , Domini , Dow Jones Sustainability Index and Wilderhill Clean Energy Index .
Another important trend is strict mechanical criteria for inclusion and exclusion to prevent market manipulation, e.g. as 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. Dickus.
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.
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
- Most Innovative ETF
- --- 2004 –- IShares MSCI EAFE (EFA) and Emerging Markets
- --- 2005 -- EasyETF GSCI Commodities ETF
- Most Innovative Index Derivative
- --- 2004 –- CBOE Volatility Index (VIX) Futures
- --- 2005 –- Options on Vanguard VIPERS at the CBOE
- Best Index-related Research Paper
- --- 2004 –- Steven Schoenfeld
- --- 2005 –- Rob Arnott
- Lifetime Achievement Award
- --- 2004 –- Tim Harbert
- --- 2005 -- William Sharpe and Nathan Most
Articles about Stock Market Index
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