How are stock indices constructed?

A stock index is an indicator that combines the price movements of many stocks to show the price level of the stock market as a whole.

There are price-weighted indices, which simply average stock prices, and market-capitalization-weighted indices, which weight prices by the number of listed shares and compare market capitalization at a base date with the present. Most major indices worldwide, such as the KOSPI, KOSDAQ and S&P500, are calculated using market-capitalization weighting.