Stock Indices

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main article: Indexing

The growing market acceptance of index based investing through the media of traditional mutual funds and exchange traded funds has resulted in a proliferation of index providers, attracted to the business prospects of licensing their indexes to investment companies and seeing increasing royalty and licensing fee revenue from the growing asset base. For investors this growth has led to an ever expanding universe of available index funds. However, the different methodologies that index providers utilize in measuring and carving up the stock market leads to a dispersion of returns that can be considerable over short and intermediate term time frames.

The benchmark indexes created by the major index providers share a number of characteristics. The index weighting of securities is based on the market capitalization of the companies included in the index. In general, the stock market is composed of 3 levels of market capitalization and 3  styles, resulting in a 3 x 3 "style" box which includes Large cap, Mid cap and Small cap stocks, divided among value, blend, and growth stocks. This is commonly represented in a style box as illustrated below:

One may also see an expanded breakdown of market cap ranges to include Mega cap, Micro cap, and Nano cap stocks.

Index providers, in attempts to make their indexes more easily investable for index funds, have adopted free-float weighting and buffer zones to their methodologies. Free float weighting eliminates non-trading shares in a company's capital base. These can include cross-ownership of shares by other companies, government owned shares, privately held shares, and other restricted shares. A company's free-float weighting will reflect the actual amount of shares available for public investment. Buffer zones were introduced to reduce the amount of turnover incurred as stocks migrate across market capitalization and style boundaries. Reduced turnover helps reduce transaction costs for funds tracking an index.

The market coverage of major index providers is supplied in Figure 1. below.


 * {| style="margin:1em auto 1em auto;" cellpadding= "3" border="1" style="border:1px solid black; border-collapse: collapse;"


 * + Figure 1.Market Coverage of Major U.S. Index Providers
 * Stock Benchmarks - Major US Index Providers.png
 * }

Major Index Providers

 * Dow Jones Indexes
 * FTSE
 * Morningstar
 * MSCI
 * Russell Indexes
 * Standard & Poors
 * Wilshire

Tutorial

 * Index Investing: What Is An Index?, from Investopedia