What is a Stock Index?

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A stock index is an indicator that tracks the performance of the market. They are based on certain criteria, including market capitalisation and share price. A market cap weighted index includes the largest companies, which affect the index’s performance more significantly. An equal-weighted index, on the other hand, treats every company equally.

Stock indices provide an essential indicator of the health of a share market, making them the foundation for financial commentary. Investment guides, financial advisers, and financial media constantly refer to these indices. In addition to being important, they are also useful in helping investors track the performance of individual shares. This is because the stock index can help investors gauge the performance of a specific stock in comparison to an entire market.

The advent of stock index futures has revolutionized the derivative security trading landscape. In 1986, the S&P 500 futures contract became the second most successful futures contract. Unlike other types of futures, stock index futures are cash settled, removing the complications of multiple delivery specifications. There are two common types of stock index futures contracts: price-weighted (DJIA) and value-weighted (S&P 500).

The S&P 500 is one of the most popular stock indexes in the world. It consists of 500 of the largest U.S. companies. These stocks are chosen for inclusion based on their market capitalization and other factors. As a result, this index represents 80 percent of the total market value in the United States, and thus gives a broad idea of market movement.

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