Stock Market Index or Stock Index is defined as the computed numerical value for the stock market for a particular section or segment of the market. Stock Index is a representation of the stock market for the set of securities from a particular market only. Various stock market indices have their own different computational methodology and are defined for a specific market segment. Hence, the relative percentage change is always more valuable than the absolute value of any stock market index.
There are various ways to classify market indices. It can be either a global or world stock market index like S&P Global 100 or a regional index like FTSE Developed Europe Index. Another way to classify stock market indices is the methodology used to calculate the price.
There can be either a price-weighted index like Dow Jones Industrial Average, or equal-weighted index like Barron’s 400 Index or a capitalization-weighted index like NASDAQ-100.
One of the most popular and diverse index across the globe is Standard & Poor’s 500. As it comprises 500 most widely traded stocks of US and represents 70% of the total US market, Standard & Poor’s 500 is a good enough indicator for the whole US stock market. It is a capitalization-weighted index (aka market-weighted index) and has representation from variety of sectors like energy, health care, information technology, financials, consumer staples and industrial.
One of the oldest indices in the world is Dow Jones Industrial Average (DJIA). It is a price-weighted index and based on simple average of per-share price of the stocks for 30 major companies of US. With the stock market becoming more and more diverse over time, simple average does not suit the complete need of current investors. However, as Dow represents major companies of US, any spike in Dow corresponds to the similar movement in US market as a whole but not definitely on the same scale.