Types of Stock Indices (Part 1)

Stock market indices may be classified and segmented by the index coverage set of stocks. The coverage of an index is the underlying group of stocks, typically grouped together with some rationale from their underlying economics or underlying investor demand, that the index is trying to represent or track.

For example, a 'world' or 'global' stock market index — such as the MSCI World or the S&P Global 100 — includes stocks from all over the world, and satisfies investor demand for an index for broad global stocks. Regional indices that make up the MSCI World index, such as the MSCI Emerging Markets index, includes stocks from countries with a similar level of economic development, which satisfies the investor demand for an index for emerging market stocks that may face similar economic fundamentals.

The coverage of a stock market index is independent from the weighting method. For example, the S&P 500 market-cap weighted index covers the 500 largest stocks from the S&P Total Market Index, but an equally weighted S&P 500 index is also available with the same coverage.

There are a number of different types of stock indices today. Some of the main types include:

• Country-focused indices:

These are designed to represent the stock markets of specific countries.

Examples include the S&P 500 which is generally seen as a broad representation of the US stock market, and the DAX 30 which is generally considered a barometer of the German economy.

• Global-based indices

It represents the performance of the global stock market. The FTSE Global Equity Index Series includes over 16,000 companies

• Exchange-based indices

These are designed to track stocks listed on a particular stock exchange. An example is the NASDAQ 100 index which tracks non-financial stocks listed on the NASDAQ exchange.

• Regional stock indices

These are designed to represent specific geographic regions.

Examples include the FTSE Developed Asia Pacific Index, which tracks the performance of stocks listed in developed countries within Asia, and the EURO STOXX 50 index, which tracks stocks in the Eurozone.

• Sector-based indices

These are designed to track particular sectors of the stock market such as healthcare stocks or financial stocks.

Reprinted from eToro, the copyright all reserved by the original author.