This is done by averaging as each stock contains a mixture of these two elements, stock news and index news. When we consider many stocks, the individual stock news tends to cancel out. Each stock is given a weight proportional to its market capitalisation, which is the share price multiplied by the number of shares making up its equity capital. But in recent years, indices find direct applications in finance, in the form of index funds and derivatives. These applications are now a multi-trillion dollar industry worldwide.
Indices also serve as a benchmark for measuring the performance of fund managers.
Suppose one wants to create a portfolio that gets the same returns as the index - that is, if the index goes up 4 per cent, the portfolio goes up 4 per cent. Being a benchmark comprising several stocks, an index is harder to manipulate than individual stocks. The weak links in an index are the large, illiquid stocks. These allow a manipulator to obtain maximum impact upon the index at minimum cost. There are mathematical formulae which ensure that yesterday's value and today's are comparable, even if a change in composition takes place in between.