What is a Stock Index?

An index represents collection of underlying securities. Technically, this makes it a derivative product, since the index itself has no value, only its underlying securities.

Indices are used to form general conceptions about how various sectors are doing. If you want to know how tech is doing in Norway, follow OSE45GI. For oil companies, follow OBOSX. etc.

How do we calculate an index price? Average of all underlying securities? Weighted averages relative to stock volume? How do you treat abnormalities, such as one stock in a group going bankrupt? Or, if you consider share numbers, how do you work in stock splits? There are many options, and henceforth many indices. In any event, indices are usually initiated at a round number like 100. That way, when you see an index at 200, you know that whichever value the index represents has doubled itself since its launch.

With some mathematical trickery we can ensure that a single security in an index cannot affect the overall price by more than a certain percentage. The rules used varies for each index. Some have a rule that applies equally for all securities (e.g. no index should account for more than 10 %), others have oddly specific rules such as that capping only applies when the largest member has more than 35% impact. The latter rule is in use in e.g. norwegian seafood indices such as OSLSFX.