Stock market index 47423 226008191 2008-07-16T12:32:18Z Natl1 2868677 Reverted edits by [[Special:Contributions/193.178.209.212|193.178.209.212]] to last version by 159.53.46.143 (using [[WP:HG|Huggle]]) <!-- There are links that don't lead anywhere --> [[Image:Comparison of three stock indices after 1975.svg|thumb|300px|A comparison of three major stock indices: the [[Nasdaq Composite|NASDAQ Composite]], [[Dow Jones Industrial Average]], and [[S&P 500]]. All three have the same height at March 2007. Notice the large [[Dot-com bubble|dot-com]] spike on the NASDAQ, a result of the large number of tech companies on that index.]] A '''stock market index''' is a method of measuring a stock market as a whole. The market can be Canadian stocks, American stocks, Bio-tech stocks, small-cap stocks, growth stocks, or any other market of interest. Many indices are compiled by news or financial services firms and are used to benchmark the performance of portfolios such as [[mutual fund]]s. == Types of indices == Stock market indexes 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 indexes are broad-base indexes comprised of the stocks of large companies listed on a nation's largest stock exchanges, such as the American [[Dow Jones Industrial Average]] and [[S&P 500]] Index, the British [[FTSE 100 Index|FTSE 100]], the French [[CAC 40]], the German [[DAX]], the Japanese [[Nikkei 225]], the Indian [[Sensex]], the Australian [[All Ordinaries]] and the Hong Kong [[Hang Seng Index]]. The concept may be extended well beyond an exchange. The [[Wilshire 5000|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 U.S. stocks traded on the [[New York Stock Exchange]] (but not [[American Depositary Receipt|ADR]]s) and most traded on the [[NASDAQ]] and [[American Stock Exchange]]. [[Russell Investment Group]] added to the family of indexes by launching the [http://www.russell.com/indexes/characteristics_fact_sheets/global/russell_global_index.asp Russell Global Index]. More specialised indices exist tracking the performance of specific sectors of the market. The [[Morgan Stanley Biotech Index]], for example, consists of 36 [[United States|American]] firms in the [[biotechnology]] industry. Other indexes 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. ==Weighting== 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]] and the [[NYSE ARCA Tech 100 Index]], 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 were included. Recently, many of them have changed to a ''[[Float (finance)|float]]-adjusted'' weighting which helps [[Index fund|indexing]]. ==Critique of Capitalization-Weighting== The use of capitalization-weighted indexes is often justified by the central conclusion of modern portfolio theory that the optimal investment strategy for any investor is to hold the market portfolio, the capitalization-weighted portfolio of all assets. However, empirical tests conclude that market indexes are not efficient.{{Fact|date=February 2007}} This can be explained by the fact that these indexes do not include all assets or by the fact that the theory does not hold. The practical conclusion is that using capitalization-weighted portfolios is not necessarily the optimal method. As a consequence, capitalization weighting has been subject to severe criticism (see e.g. Haugen and Baker 1991, Amenc, Goltz, and Le Sourd 2006, or Hsu 2006), pointing out that the mechanics of capitalization weighting lead to trend-following strategies that provide an inefficient risk-return trade-off. Also, while capitalization weighting is the standard in equity index construction, different weighting schemes exist. First, while most indexes use capitalization weighting, additional criteria are often taken into account, such as sales/revenue and net income (see the “Guide to the Dow Jones Global Titan 50 Index”, January 2006). Second, as an answer to the critiques of capitalization-weighting, equity indexes with different weighting schemes have emerged, such as "wealth"-weighted (Morris, 1996), [[fundamental weighting|“fundamental”-weighted]] ([[Rob Arnott|Arnott]], Hsu and Moore 2005), “diversity”-weighted (Fernholz, Garvy, and Hannon 1998) or equal-weighted indexes. == Indexes and passive investment management == There has been an accelerating trend in recent decades to create [[passive management|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 [[active management|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 - a result nearly equal to the average expense ratio of mutual funds (fund expenses are a drag on the funds' return by exactly that ratio). 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 fund managers' 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 == Ethical stock market indices== A notable specialised index type is those for [[ethical investing]] indexes that include only those companies satisfying ecological or social criteria, e.g. those of [[Calvert Social Index|The Calvert Group]], [[Domini 400 Social Index|KLD]], [[FTSE4Good Index]], [[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. 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. 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. == Environmental stock market indices== An environmental stock market index aims to provide a quantitative measure of the environmental damage caused by the companies in an index. Indices of this nature face much the same criticism as Ethical indices do — that the 'score' given is partially subjective. However, whereas 'ethical' issues (for example, does a company use a [[sweatshop]]) are largely subjective and difficult to score, an environmental impact is often quantifiable through scientific methods. So it is broadly possible to assign a 'score' to (say) the damage caused by a tonne of [[mercury (element)|mercury]] dumped into a local river. It is harder to develop a scoring method that can compare different types of pollutant — for example does one hundred tonnes of [[carbon dioxide]] emitted to the air cause more or less damage (via [[climate change]]) than one tonne of mercury dumped in a river (and poisoning all the fish). Generally, most environmental economists attempting to create an environmental index would attempt to quantify damage in monetary terms. So one tonne of carbon dioxide might cause $100 worth of damage, whereas one tonne of mercury might cause $50,000 (as it is highly toxic). Companies can therefore be given an 'environmental impact' score, based on the cost they impose on the environment. Quantification of damage in this nature is extremely difficult, as pollutants tend to be market [[externalities]] and so have no easily measurable cost by definition. == Innovations Awards to Stock Indexes == * Most Innovative Benchmark Index ** 2004 — [[CBOE]] [[S&P 500]] [http://www.cboe.com/micro/bxm/introduction.aspx BuyWrite Index (BXM)]<!-- Broken link --> ** 2005 — [[FTSE]]/[[Fundamental Indexes|RAFI Fundamental Index Series]] ** [http://biz.yahoo.com/prnews/061219/phtu019.html?.v=77 2006] — [http://www2.standardandpoors.com/servlet/Satellite?pagename=sp/Page/PressSpecialCoveragePg&c=sp_speccoverage&cid=1143857726920&r=1&l=EN&b=4 Standard and Poor’s Case-Shiller House Prices Indices] * Most Innovative ETF ** 2004 — [[iShares]] [[MSCI EAFE]] (EFA) and Emerging Markets ** 2005 — EasyETF [http://www2.goldmansachs.com/gsci/ GSCI] Commodities ETF ** 2006 — [http://www.powershares.com/home.aspx PowerShares] DB Commodity Index Tracking Fund (DBC) and [http://www.powershares.com/home.aspx PowerShares] G10 Currency Harvest Fund (DBV) * Most Innovative Index Derivative ** 2004 — [[CBOE]] [http://www.cboe.com/micro/vix/introduction.aspx Volatility Index (VIX) Futures] ** 2005 — Options on [http://www.vanguard.com/ Vanguard] VIPERS at the [[CBOE]] ** [http://biz.yahoo.com/prnews/061219/phtu019.html?.v=77 2006] — [[Chicago Board Options Exchange]] [http://www.cboe.com/micro/vix/vixoptions.aspx Options on the CBOE Volatility Index] ([[VIX]]) * Best Index-related Research Paper ** 2004 — [http://www.northernfunds.com/about/news/schoenfeld_review.pdf Steven Schoenfeld] ** 2005 — [http://www.researchaffiliates.com/about/arnott.php?PHPSESSID=eac88784bef68ddb5574296db3f1e4fb Rob Arnott] ** 2006 — [http://faculty.chicagogsb.edu/eugene.fama/vita/VITA.pdf Eugene F. Fama] and [http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/curriculum_vitae.html Kenneth R. French] * Lifetime Achievement Award ** 2004 — Tim Harbert ** 2005 — [http://www.stanford.edu/~wfsharpe/ William Sharpe] and Nathan Most ** 2006 — [http://www.princeton.edu/~bmalkiel/ Burton G. Malkiel] and Ronald J. Ryan == See also == * [[Exchange-traded fund]] * [[Index (economics)]] * [[Index fund]] * [[Index investing]] * [[Passive management]] {{UK Stock market indexes}} {{Stock market indexes}} {{Asian Stock market indexes}} ==References== <references/> *Amenc, N., F. Goltz, and V. Le Sourd, 2006, “Assessing the Quality of Stock Market Indices”, EDHEC Publication *Arnott, R.D., J. Hsu, and P. Moore, 2005, “Fundamental Indexation”, Financial Analysts Journal 60(2), 83–99. *Broby, D.P., 2007 "A Guide to Equity Index Construction", Risk Books. *Fernholz, R., R. Garvy, and J. Hannon, 1998, “Diversity-Weighted Indexing”, Journal of Portfolio Management, 24(2), 74–82 *Haugen, R.A., and N.L. Baker, 1991, “The Efficient Market Inefficiency of Capitalization-Weighted Stock Portfolios”, Journal of Portfolio Management *Hsu, Jason, 2006, “Cap-Weighted Portfolios are Sub-optimal Portfolios”, Journal of Investment Management, 4(3), 1–10 ==External links== * [http://www.edhec-risk.com/features/RISKArticle.2006-10-18.3754 EDHEC recommends that institutional investors take greater care in the construction of their benchmarks] * [http://www.indexrecord.com Global stock market indices] [[Category:Stock market]] [[Category:Stock market indices|*]] <!-- interwiki --> [[ar:مؤشر البورصة]] [[bs:Berzovni indeks]] [[de:Aktienindex]] [[es:Índice bursátil]] [[fr:Indice boursier]] [[ko:주가 지수]] [[id:Indeks pasar saham]] [[it:Indice azionario]] [[nl:Aandelenindex]] [[ja:株価指数]] [[pl:Indeks giełdowy]] [[ro:Indice bursier]] [[ru:Биржевой индекс]] [[sk:Burzový index]] [[sv:Aktieindex]] [[zh:股價指數]]