About Stock Market Indices

Global stock market indices include the largest companies from around the world, regardless of their location or where they trade stocks. The MSCI World is an example of a global stock market index. It contains over 1,500 world stocks, and is often used as the primary benchmark by which global stock performance is assessed.

National stock market indices represent a particular country's stock market performance, and thus the feelings about the state of the national economy. National stock market indices like the Japanese Nikkei 225 are composed of a country's largest companies and are regularly quoted. Some national stock indices take into account a variety of specific exchanges. The Wilshire 5000 Index, for example, is a measure of the performance of almost every publicly traded company in the United States. It takes into account the New York Stock Exchange, NASDAQ and American Stock Exchange.

Lastly, some indices are much more focused and analyze only specific portions of the market. The Wilshire US REIT, for example, analyzes 80 American investment trusts in the real estate business. Some specialized indices track companies of a specific size, some with specific types of executive leadership, and so on.

Some stock market indices have different versions which account for only specific aspects of the market. A certain stock market index might have three versions which analyze price return, total return and net total return. The Wilshire 5000, for example, has five full versions, including full capitalization price, float-adjusted price, full capital return, float-adjusted total return, and equal weight. Each of these versions differs in the way in which index components are weighted and the manner by which dividends are accounted.

Weighting refers to how a specific market type determines the total value of the market. The Dow Jones Industrial Average, for example, is a price-weighted index. This means the price of each stock is the only factor that goes into determining the total value of the index. Thus, small companies can create large ripples within price-weighted indices because company size is not weighted into the index value.

Market-value weighted indices, on the other hand, factor company size into their total index value. This means that large companies can affect the market with small shifts, while smaller companies need larger stock price alterations to significantly affect the total market value. Modified capitalization-weighted indices are like market-value indices except the largest stocks have a cap on how much they can affect the total market value. When a company reaches its limit, excess weight is redistributed evenly among other stocks under the cap. In recent years, modified capitalization-weighted indices have become more popular due to the fact that they are thought to create more efficient long-term stock purchasing strategies than true capitalization-weighted indices.