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Stock Market Index

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A stock market index is a hypothetical basket of securities designed to track market changes. The most widely followed US stock market indexes are the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite. Important international stock market indexes are the Nikkei 225 (Japan), FTSE 100 (UK) and Hang Seng (Hong Kong). Many stock market indexes can be traded with ETFs, futures and options.

Each stock market index has its own methodology for calculating the effect of changes in individual index components. The Dow Jones, for example, is a price-weighted stock market index where a rise of $1 in the stock of a $300B company produces the same affect as a rise of $1 in the stock of a $30M company stock. Most stock market indexes use capitalization-weighted adjustments to account for the differences in company size.

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