Stock Market Indexes


The stock market index is an indicator of the dynamical state of the security market. By comparing current market index value to its previous values it is possible to estimate the market behavior, its reaction to macroeconomic changes and corporate events (mergers, acquisitions, etc.).

The stock index is calculated on the basis of prices of a certain group of securities (index basket). The initial value of the index may be the sum of the prices or be equated to a random number (for example, 1000). The prices are often multiplied by special coefficients. The index price change over time is more important that its absolute value.

Depending on the index basket components, the index can characterize a market as a whole, a market of a certain kind of securities, industry market (for example, telecommunications, transport and more). Comparing the dynamics of various indices, we can give a comparative assessment of the development of various economic sectors. Stock market indices are more often calculated and published by news or rating agencies and stock exchanges. The name of the index often contains the number of securities included in the index (for instance, S&P 500, FTSE 100).

Stock market indices are also a basis for derivative instruments, such as futures and options, which are used for investment and speculative purposes, as well as for hedging to reduce risks. Moreover, the index value is interpreted as the price of this instrument.

There are several methods for calculating a market index; the main of them are methods of weighting by price and weighting by capitalization. The price-weighted index is the sum of all assets included in the index, divided by a coefficient (for example, the Dow Jones Index). The capitalization-weighted or "cap-weighted" index is calculated as a total market value of all assets included in the index, divided by a coefficient (for example, S&P 500). Most of modern stock market indexes are weighted by free-float weighting. The company's capitalization is the total value of securities issued by the company, calculated at the market price. The calculation parameters may change over time due to corporate events of companies and because of changes in the list of the securities, included in the index.

The very first stock market index was developed in 1884 in the United States - Charles Dow began to count the average change in market prices for 11 major industrial companies. Since 1928, the Dow Jones has been calculated for 30 companies.

The most popular indices in the world are the stock indexes of companies traded on the U.S. (DJI, S&P 500, NASDAQ 100) and European (DAX, CAC 40, FTSE 100) Exchanges, as well as the Japanese stock index called NIKKEI 225. Besides the main index, each of these stock market indexes has an index group differing by composition, economic sector, and other parameters too.

The DAX or DAX 30 Index (abbreviation for Deutscher Aktienindex) is the most significant stock index in Germany. The index is computed as a weighted average of value of prices of stocks of the 30 largest German stock companies (capitalization is calculated only for shares in free float). The DAX index takes into account the dividents on shares as well. Thus, the DAX 30 reflects the total income of the shareholders.

The CAC 40 Index (abbreviation for Cotation Assistée en Continu) is the most significant stock index in France. The index is calculated as a weighted average of the value of the prices of the 40 largest French stock companies. Shares of these companies are in free float and are traded in Euronext Paris Stock Exchange. The CAC 40 Index does not consider stock dividends.

The FTSE 100 Index (abbreviation for Financial Times Stock Exchange Index) - is the most significant stock index in Great Britain. The index is computed by the independent company FTSE Group. The FTSE 100 Index is computed as a weighted average of value of prices of stocks of the 100 largest stock companies, trading on the London Stock Exchange (LSE). Stocks of these companies are in free float. Total capitalization of these companies is 80% of capitalization of all stocks, traded on the LSE.

The Euro Stoxx 50 is the index of stocks of the 50 largest companies of Eurozone working in various sectors of the economy. The Euro Stoxx 50 characterizes the state of the stock market of the European Union. The index is calculated by Stocks Ltd, the global provider of indices, which is owned by the Deutsche Boerse Group. The Euro Stoxx 50 is computed as a weighted average of value of prices of stocks of the 50 largest stock companies trading on the Eurex Exchange. The Euro Stoxx 50 index takes into account the volume of paid dividends as well.

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