A stock index (stock index) is a composite indicator that is used to assess the behavior of a group of shares and subsequent assessment against their background of the progress of global processes occurring in the securities market. As a rule, the absolute value of a stock index is not of interest from an analytical point of view.
Being an indicator of changes in prices for a group of securities, goods or derivative financial instruments, a stock index is especially interesting for analysts in dynamics: the direction of market movement is assessed precisely on the basis of changes in the index over time, and the prices of shares in a selected group can change in completely different directions. Depending on the selected indicators, stock indices allow you to get an idea of changes within a particular sector or the entire market as a whole.
The priority purpose of the futures contracts market is hedging (insurance) of risks associated with any assets or investments. The particular popularity of trading in futures (exchange) indices is primarily due to their connection to the stock market.
The value of a stock index is a calculated value, which is formed on the basis of the prices of all shares included in the calculation of this index that are traded on a given exchange - that is why, when creating a diversified portfolio of investments in shares, the stock index is considered as a good solution. Naturally, the object of insurance or speculative operations is not the index itself, which cannot be purchased as property, but changes in the value of the stock exchange index (a price is assigned to each point of change in the value of the index).
The number of shares included in the calculation of a particular stock index can usually be determined by the number at the end of the name of the stock index: Russell 2000, S&P 500, Nikkei 225, FTSE 100, NASDAQ 100, DJ Euro STOXX 50, CAC 40, DAX 30 Accordingly, a change in the value of a stock index is a reflection of the price dynamics of tens or hundreds of shares.
Today, there are more than two thousand different stock indices in circulation, among which several of the most popular are the stock indices Dow Jones, DAX, Nikkei, NASDAQ, RTS, Standard & Poor’s 500, FTSE.
Dow Jones Stock Index (DJIA)
The DJIA stock index (Dow Jones Industrial Average) is one of the most famous stock indices in the world. The Dow Jones index was first used more than a hundred years ago. Of course, over such a period of existence of this stock index, both the number of shares by which it is calculated and the names of the enterprises whose shares were originally used have changed. Moreover, of the companies that were decisive in the nineteenth century, only a few remain today.
Quantitative changes during the century-long history of this stock index looked like this: in 1896, the Dow Jones index was calculated using the stock prices of a dozen companies, in 1916, based on the stock prices of twenty companies, and since 1928, the Dow Jones index has been consistently calculated using the stock prices of thirty enterprises. The arithmetic average of the stock prices of these thirty largest US companies, also called “blue chips”, is the famous Dow Jones stock index.
In addition to the main one, the Dow Jones stock indices are also calculated for specific market sectors: the Dow Jones utility index (based on the price of shares of 15 enterprises), the Dow Jones transport index (based on the price of shares of the 20 largest industry enterprises), a composite index, calculated which includes the prices of 65 stocks, and several other stock indices.
DAX stock index (DAX 30)
The family of German stock indices DAX is represented by a number of different stock indices: the TecDAX high-tech index, the HDAX extended blue chip stock index, the MDAX mid-market index, and the SDAX mid-century stock index. The main stock exchange index in Germany is the DAX (FDAX).
This stock index, introduced in 1988, is calculated based on the share price of thirty German companies recognized as leading in various sectors of the economy: BASF, Deutsche Telekom, Siemens, Allianz, Bayer AG, Commerzbank, Lufthansa, Deutsche Bank and others.
Nikkei stock index
The family of stock indices of the Tokyo Stock Exchange got its name from the newspaper in which these indices, considered the main stock indices of Japan, have been published for several decades: Nikkei 500 (Nikkei 500 Stock Average), Nikkei All Stock Index, Nikkei Stock Index 300.
The most famous of this family is the Nikkei 225 stock index - a weighted average of the share prices of two hundred and twenty-five companies that are most actively traded on the first section of the Tokyo Stock Exchange. The original name of this stock index, by which it was known for two decades since its inception (September 1950), was TSE Adjusted Stock Price Average. In 1970, the authority to calculate this stock index passed to the Nikhon Keizai Shimbun newspaper, the abbreviated name of which gave the modern name to the Nikkei family of indices.
NASDAQ Stock Index
The most famous in the NASDAQ family of stock indices are the NASDAQ Composite and NASDAQ 100 stock indices. The NASDAQ stock exchange (National Association of Securities Dealers Automated Quotation), which, along with the NYSE and AMEX, belongs to the main US stock exchanges, was founded in February 1971 and is focused on trading shares of companies engaged in the field of high technologies (introduction of biotechnology achievements, production of electronics, computer equipment and equipment, creation of telecommunications and software, etc.) Today, shares of more than 5,000 core companies are traded on this exchange - and almost all of them are used in calculating the NASDAQ Composite index.
Stock indices of the NASDAQ family are designed for reliable orientation in the conditions of the American high-tech market and help to adequately take into account the impact of US political and economic events on business areas related to the functioning of this market.
Industry stock indices of this family are also popular - such as NASDAQ Computer, NASDAQ Bank, NASDAQ Transportation, NASDAQ Biotechnology, NASDAQ Insurance, NASDAQ Telecommunications, NASDAQ Other Finance, NASDAQ Industrial and others.
RTS stock index
RTS, or Russian Trading System (RTS) is a stock exchange founded in 1995 with the aim of creating a centralized securities market in Russia on the basis of the previously established regional stock markets that were functioning at that time.
The RTS family of stock indices (RTS) includes stock indices RTST, RTSI, S&P/RUX, Rux-Cbonds and S&P/RUX-OIL and is designed to assess the market capitalization of the largest companies Russian Federation. Exchange indices are calculated based on the amount of transactions regarding bonds of the index list carried out during the main trading session of the MICEX Stock Exchange (Moscow Interbank Currency Exchange).
Standard & Poor's 500 Stock Index (S&P 500)
This stock index, which has received the figurative name “barometer of the American economy” for its special indicativeness, is traditionally calculated by the US rating agency Standard & Poor's, which is reflected in its official name. The calculation of the market value-weighted S&P 500 stock index includes the value of half a thousand American shares corporations traded on the New York Stock Exchange and the National Association of Securities Dealers Automated Quotation (NASDAQ) exchange, two of the most important stock exchanges in the United States.
The S&P 100 stock index, which is calculated based on the value of the shares of one hundred largest enterprises, is also of practical value, and there are also about one hundred industry stock indices that are trusted and popular, which are calculated using a similar methodology. This approach makes it possible to obtain a more complete overall picture of the state of the US economy by drawing parallels between data representing individual sectors of the economy.
Russell Stock Index
The Russell family of market capitalization-weighted stock indices is published by the Frank Russell Company in Tacoma, Washington. The Russell 1000 stock index is a good correlate of the S&P500 stock index, the Russell 2000 stock index is trusted as a measure of market prices for small-cap stocks, and the Russell 3000 is also a popular stock index.
MICEX stock index
The MICEX stock index is the new name of the MICEX Consolidated Stock Index, known since 1997. The Moscow Interbank Currency Exchange (MICEX, or MICEX) is a trading platform on which the vast majority of transactions involving shares of Russian issuers are concluded. The MICEX stock index (this name was established on November 28, 2002) is an effective capitalization-weighted stock market index of the market for the most liquid shares of Russian issuers in circulation on the MICEX Stock Exchange CJSC.
On March 19, 2001, the MICEX10 stock index was introduced - a price (unweighted) index used to track in real time (from 10.30 to 19.00) the increase in the value of a portfolio of ten initially equal-weighted shares in the portfolio. Initial value stock index, taken as 100 points, calculated as of December 30, 1997, the calculation formula is the arithmetic average of changes in the prices of ten shares that have maximum liquidity on CJSC MICEX Stock Exchange.
RCBI (Russian Corporate Bond Index) is the Russian stock exchange index of corporate bonds of the MICEX, a price stock index that is calculated in real time based on transactions made during main trading on the Moscow Interbank Currency Exchange. It is an exchange index of bonds traded on the MICEX, weighted by market capitalization.
Stock indices are instruments that give an idea of the current state of the stock markets, in other words, they show the direction of market movement. They are often also called stock funds.
Stock indices are calculated based on a certain number of securities. The number of stocks that contribute to a given stock index is usually listed at the end of its name, such as the DAX 30, CAC 40, NASDAQ 100 and S&P 500. Thus, changes in the value of a stock index reflect the price movements of hundreds or dozens of stocks. And different stock indices of the same stock market allow us to evaluate it from different angles.
Key stock indices and their characteristics
Nowadays, there are over two thousand different stock indices in circulation. But among them it is worth highlighting several of the most popular - these are the indicators FTSE 100, S&P’s 500, RTS, NASDAQ, Nikkei, DAX, Dow Jones, MICEX.
FTSE 100
This index characterizes the state of the UK stock market. The FTSE 100 is one of the most significant indicators of Europe. It is based on 100 liquid shares that are listed on the LSE London Stock Exchange. Calculated since 1984
Standard & Poor's 500
For its special significance, this indicator is often called a barometer. As the name suggests, the determination of this stock exchange indicator is traditionally carried out by the US rating agency Standard & Poor's. It takes into account changes in the market value of securities of 500 US corporations that are listed on the two most important American stock exchanges - NYSE and NASDAQ.
The Russian Trading System) is a stock exchange created in 1995 with the aim of establishing a centralized market for all Russian securities on the basis of the regional stock markets operating at that time.
A number of PTC stock indices (RTC) include stock indices S&P/RUX-OIL, S&P/RUX, RTSI, Rux-Cbonds and RTST and are intended to assess the capitalization of large Russian companies.
The most popular in the family of NASDAQ stock indicators are the NASDAQ 100 stock indicators along with the NASDAQ Composite. which, together with AMEX and NYSE, belongs to the main US stock exchanges, appeared in early 1971 and is aimed at trading securities of companies specializing in high technology.
The series of stock indices of the Japanese Stock Exchange in Tokyo got their name because of the newspaper that has been publishing these main indices of Japan for several decades: the Nikkei 500 indicator, the Nikkei 300 indicator, the Nikkei All Stock Index.
The most popular in this family is the Nikkei 225 stock indicator, which shows the weighted average cost of securities of 225 companies that are represented in the first section of the Tokyo Stock Exchange.
This is the main stock exchange indicator, which appeared in 1988, and takes into account the value of 30 German companies that are leaders in various sectors of the economy: Deutsche Bank, Lufthansa, Commerzbank, Bayer AG, Allianz, Siemens, Deutsche Telekom, BASF and others.
Dow Jones (DJIA)
There is probably no person in the world who has not heard about this index. The Dow Jones index was first used more than a century ago. The number of companies whose shares were taken into account in calculating the value of this stock exchange indicator changed several times over time. At first, in 1896, there were 13, in 1916 - 25, and from 1928 to the present day, the Dow Jones Industrial Average has been consistently based on the stock prices of 30 companies. In fact, it is equal to the arithmetic average value of the securities of these largest American corporations.
In addition to the main one, the values of the Dow Jones stock indices are also calculated for certain sectors of the economy: the transport indicator DJ (based on the value of securities of 20 industry giants), the utility indicator DJ (based on the value of securities of 15 companies), as well as a composite index based on the cost of 65 shares, and a number of other stock indices.
MICEX
It is a composite index of the Moscow exchange of the same name, for the calculation of which the price of the most liquid securities of Russian companies is taken into account. Original meaning This indicator was calculated at the end of 1997 and taken as 100. To determine it, the price of the ten most liquid shares is taken into account.
Today, each stock exchange presents its own stock indices, which differ by industry, market and number of securities. But what is a stock index and what does it show, how does it work and why is it needed?
Instead of an introduction, using the example of the very first index in the world - let's see what a stock index is and what it shows.
The first stock exchange index appeared in 1884, when it was invented and introduced to the stock exchange. He united the most powerful shares at that time - 11 transport companies and did average price on those securities (Dow Jones Transportation Average). It turned out that the index showed the growth or decline of the largest and most important companies in the United States, as a reflection of the country's economy as a whole. This index still exists today, only today it contains not 11, but 20 companies.
What is a stock index in simple words
Stock index (Index) or whatever it is also called stock index is an indicator of price changes for a certain group of securities. Most often, indexes are created specifically for tracking general condition a specific stock market, for example, the index includes shares of the 100 largest companies on the NASDAQ exchange, and the index includes the 190 largest companies by capitalization only in the medical and biotech industry.
If the name of the index contains a digital value, it indicates the number of companies included in the “basket”, according to which the index is calculated, for example, this is the French index of the 40 largest companies in the country, or the Japanese index, calculated from 225 shares of the largest companies in Japan by capitalization .
If we talk about what a stock index is in simple words, then this is a ready-made portfolio of shares, the value of which can show the dynamics of the development of an industry or even the country’s economy.
In order to calculate general indicators, each index must have some kind of calculation basis, that is, the composition of the companies’ securities - this is called “ basket" This “basket” may include, for example, shares of the country’s largest industrial enterprises, the largest film companies, auto concerns, and so on by industry.
Stock index quotes reflect average cost shares of companies included in the " cart" At the same time, the absolute value of the indicators is uninformative; only the dynamics are important. If the index shows growth, then the largest corporations are in perfect order, and we can conclude that, in general, the economic sector in the country is “healthy”; if the indices are falling, it means that investors have begun to get rid of shares - a sign that the country’s economy Not everything is so rosy, there are reasons for concern.
Legally, indices are owned by individual companies, which belong to the owners and main shareholders of exchanges, as well as private companies. A striking example is the index, its basket and calculation belong to the company Standard & Poor's, which was founded in 1860 ( The S&P 500 index itself appeared only in 1957). Today Standard & Poor's company is a reputable international rating agency engaged in analytics financial markets and owned by the parent company McGraw-Hill, which since 2016 has been called S&P Global Inc.
Family of stock indexes
Each stock exchange or company has a number of indices, which have so-called sub-indices, collectively this is called a stock index family. For example, take the main stock index of China - which belongs to the company HSI Services Limited. This index appeared in 1969, and today the capitalization of its basket exceeds 3 trillion. dollars, the number of companies changes periodically and fluctuates around 50.
Later, Hang Seng acquired a whole family of indices:
The same Dow Jones index also has a huge family, like any other major stock index.
Take a look at the NYSE family of stock indexes:
| Index name | SYMBOL | BB CODE | REUTERS CODE |
|---|---|---|---|
| NYSE Arca Airline Index | XAL | XAL | .XAL |
| NYSE Arca Junior Gold BUGS Index | JHUI | JHUI | .JHUI |
| NYSE Arca Biotechnology Index | BTK | BTK | .BTK |
| NYSE Arca Major Market Index | XMI | XMI | .XMI |
| NYSE Arca Computer Hardware Index | HWI | HWI | .HWI |
| NYSE Arca Mexico Index | MXY | MXY | .MXY |
| NYSE Arca Defense Index | DFI | DFI | .DFII |
| NYSE Arca Mini-Biotechnology Index | B.J.E. | B.J.E. | .BJE |
| NYSE Arca Electric & Gas Infrastructure Index | RPE | RPE | .RPE |
| NYSE Arca Mini-Natural Gas Index | MNG | MNG | .MNG |
| NYSE Arca Equal Weighted Pharmaceutical Index | DGE | DGE | .DGE |
| NYSE Arca Mini-Oil Index | BZJ | BZJ | .BZJ |
| NYSE Arca Gold BUGS Index | HUI | HUI | .HUI |
| NYSE Arca Mini-Pharmaceutical Index | KBK | KBK | .KBK |
| NYSE Arca Hong Kong 30 Index | HKX | HKX | .HKX |
| NYSE Arca Mini-Securities Broker/Dealer Index | JBV | JBV | .JBV |
| NYSE Arca Institutional Index | XII | XII | .XII |
| NYSE Arca Natural Gas Index | XNG | XNG | .XNG |
| NYSE Arca Japan Index | JPN | JPN | .JPN |
| NYSE Arca Networking Index | NWX | NWX | .NWX |
| NYSE Arca China Index | CZH | CZH | .CZH |
| NYSE Arca North American Telecommunications Index | XTC | XTC | .XTC |
| NYSE Arca Disk Drive Index | DDX | DDX | .DDX |
| NYSE Arca Oil Index | XOI | XOI | .XOI |
| NYSE Arca Global Airline Index | AXGAL | AXGAL | .AXGAL |
| NYSE Arca Pharmaceutical Index | DRG | DRG | .DRG |
| NYSE Arca Hong Kong Option Index | HKO | HKO | .HKO |
| NYSE Arca Securities Broker/Dealer Index | XBD | XBD | .XBD |
| NYSE Arca Airline Total Return Index | MLXAL | MLXAL | .MLXAL |
| NYSE Arca Semiconductor Index | SIS | SIS | .SIS |
| NYSE Arca Environmental Services Index | AXENV | AXENV | .AXES |
| NYSE Arca Gold Miners Index | GDM | GDM | .GDM |
| NYSE Arca International Market Index | ADR | ADR | .ADR |
| NYSE Arca Computer Technology Index | XCI | XCI | .XCI |
| NYSE Arca Steel Index | STEEL | STEEL | .STTL |
| NYSE Arca Tech 100 Index | PSE | PSE | .PSE |
| NYSE Arca Telecommunications Index | PHN | PHN | .PHN |
| NYSE Arca Tobacco Index | TOB | TOBX | .TOB |
Major stock indices
Currently, there are thousands of stock indices, but among them the most important can be identified - the main stock indices, which usually have a long history.
In 1896, another index appeared, which is perhaps the most famous in the world - Dow Jones Industrial Average(Dow Jones Industrial Average, DJIA). Currently, the 30 largest US enterprises participate in the calculation of this index. 
The prefix “industrial” remains a tribute to history, since many companies participating in the calculation of the indicator do not belong to the industrial sector.
The index “basket” includes such giant companies as Apple, Microsoft, Boeing, Coca-Cola, Nike and others. Therefore, this index reflects not only the general mood of business development in the United States, but also the country’s economy as a whole.
The index reacts with lower values to major disasters affecting the United States. In particular, after the terrorist attacks of September 11, 2001, on the very first trading day the index fell by more than 7%.
There are 2 more important Dow Jones stock indices:
- Dow Jones Utility Average (Dow Jones Utility Index, DJUA), which is calculated based on the share price of utility companies (gas supply, electric distribution companies);
- The Dow Jones Composite Average (Dow Jones Composite Index, DJCA) is an indicator compiled based on the indicators of all the above-mentioned Dow Jones indices.
The USA, being the founding country of stock indices, can boast of several more world-famous indicators:
- S&P 500– stock index of 500 American companies with the largest capitalization. The index is maintained by the analytical company Standard & Poor’s (S&P).
- NYSE Index- a calculated indicator based on the value of all corporations registered on the New York Stock Exchange.
- NASDAQ Index – calculated indicator several thousand high-tech companies.
European stock indices
There are also well-known indices in Europe:
- German DAX 30 calculated based on data from the 30 largest corporations in Germany.
- French CAC 40, which is calculated based on the 40 largest French companies.
- FTSE 100– London Stock Exchange index, which is calculated based on 100 companies with the largest capitalization.
European indices are not as widely known as American ones, since they are much younger, but the world's largest corporations also participate in their calculations. For example, the “basket” contains companies such as BMW, VW, Henkel, and in – Airbus, Danone.
In Russia, stock indices are calculated by the Moscow Exchange. These are the MICEX and RTS indices. They represent indicators of the 50 largest enterprises in Russia from different areas of the economy - from oil and gas industrial sites and financial groups to telecommunications companies and consumer sector organizations.
The MICEX index is expressed in rubles, and the RTS index is expressed in US dollars. The “basket” includes companies such as Bashneft, Tatneft, Sberbank, Magnit, Aeroflot, Lukoil, Gazprom and others.
Stock index trading
Stock indexes themselves are not assets, they are simply weighted average quotes of a basket of stocks. But how to trade using indices? The main tool for making money by trading stock indices are futures contracts. Index futures are settlement only, without the right of delivery, like, say, oil futures. Trading is carried out exclusively in relation to index values; ownership rights to shares of enterprises included in the “basket” do not arise.
IN last years increasingly popular, which are also called index funds, since they basically copy index buckets.
Here's how it works:
An ETF fund buys all the shares of a basket of a certain stock index and holds it in its assets. The ETF itself is a public company and sells its shares on the stock exchange. The investor buys shares of this ETF that are a reflection of the selected index.
For example, the well-known and largest owner of ETF funds is the company Invesco PowerShares. One of her funds is PowerShares QQQ(NASDAQ:QQQ) is a complete copy of the NASDAQ 100 index.
How to use stock indices in stock trading
Considering that a stock index is a kind of indicator of the sentiment of the securities market as a whole, it can tell how the quotes of individual assets included in the “basket” will behave.
There is a clear positive correlation between the price charts of the index and an individual stock. Thus, the performance of a stock index must be taken into account when trading shares of companies included in the observation segment of such an index.
Daily charts of the RTS index and Sberbank shares. There is a clearly expressed positive correlation between the charts - the movements of assets are largely repeated. If the index grows, then Sberbank shares also rise in price.
Asset correlation can be used in your trading as a confirmation signal - if the stock index goes down, then you can expect a drop in the quotes of specific shares.
- It will also be useful for each trader to study the influence of individual stock indices on currency pairs. For example, the Nikkei 225 index has close connection with currency pairs with JPY.
Let's summarize what stock indices are.
Stock ( stock exchange) indexes– this is not just analytical information that can be useful only to statistics lovers. This is a full-fledged working tool with which you can make independent transactions ( purchasing index futures), assess the state of the industry, conduct fundamental analysis market, focus on ready-made portfolios and invest in ETF funds.
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We often hear that stock exchanges opened with indices rising by several percent. Or vice versa, the index fell by 50 points. The MICEX index rose by 24% over the year? And the RTS index fell by 2 times during the same time. What do all these words mean? How to understand whether the economy is growing or falling. What is the investment climate in the country? In this article we will look at what stock indices are, what they mean and where and what they are used for.
History of the origin of indices
The very first index was invented by Edward Jones and Charles Dow. It included 12 of the largest enterprises in the United States. The index was calculated quite simply: the arithmetic mean of the composition of the companies included in it. And although since then the parameters for determining this index have undergone many changes, as well as the number of companies included in it, this moment it remains one of the most popular in the world. You've probably heard about him - DOW JONES Index.
What are stock indices
Let's imagine the picture. On stock market Hundreds, thousands, tens of thousands of shares of various companies are in circulation. And every day some of them grow, others fall, and still others stagnate in a certain range. And how to determine the overall dynamics of the market? This is what stock indices are used for.
The essence of the index is as follows: Companies included in the index are selected based on a certain criterion and a certain value is derived based on certain calculations. This value or index value itself provides absolutely no information. The benefit of using indexes is the change in its values, which is taken either as a percentage or in points.
It is by the dynamics of changes in indices that one can judge whether the market is growing or falling. Those. if the index rises, it means that the shares of most of the companies included in it are growing, or according to at least those companies whose share in the index is large enough to pull the index in their direction grow.
Let’s say in the MICEX index the share of the 4 largest companies (Gazprom, Sberbank, Magnit and Lukoil) is approximately 30%.
Using indices, you can measure various market parameters. There are industry indices that include only companies belonging to the same industry, for example, the financial sector, mechanical engineering, energy, etc. There are indices that include only the largest companies.
How are stock indices calculated?
The calculation of stock indices may involve various mechanisms. Initially it was just the arithmetic average. But such a calculation did not give an accurate idea of the market movement. All companies differ from each other in capitalization, and each of them should influence the country's economy in different ways. Therefore, at the moment, other methods of forming indices are used: (simple and weighted average, arithmetic and geometric average, and others). Each index has its own calculation mechanism.
The calculation of stock index indicators is carried out either rating agencies, or stock exchange agencies. The name of the index basically consists of an abbreviation and sometimes a number indicating the number of companies included in the index.
The most popular stock indices in the world
Dow Jones— Dow Jones Industrial Average. Probably the most popular index in the world. The membership includes 30 of the largest US companies from various industries: finance, transportation, consumer goods, food and industrial sectors. The index includes world-famous companies: Coca-Cola, IBM, Intel, MicroSoft, General Motors and others.
S&P 500— an index that includes the 500 largest US companies by capitalization. Therefore, the index itself can be used to judge how things are going in the country’s economy, since it affects all the main sectors of the country.
Nikkei 225— Japanese index, which includes 225 companies. The composition is reviewed annually. It includes such giants as Honda, Panasonic, Mazda and others. With a 99.9% probability, all Japanese brands that you know are included in the NIKKEI 225. Like the S&P 500, it fairly objectively reflects the state of the economy. The most important index in the Asian region.
DAX- German stock index, which includes the 30 most important companies in the country: Adidas, BMW, Henkel, Volkswagen and others.
FTSE 100— the most respected and quoted index on European exchanges. Among the 100 largest companies traded on the London Stock Exchange.
CAC 40- French stock index, which includes 40 largest companies traded on the Paris Stock Exchange: Renault, L'Oreal.
MICEX and RTS— 2 stock indices, including 50 of the most liquid and largest companies in Russia. The index includes such giants as Gazprom, Rosneft, Lukoil, Sberbank, Magnit, etc.
The calculation mechanism for Russian indices is absolutely the same. The difference is that the MICEX is calculated in rubles, and the RTS is calculated in dollars.
Today you will learn about what they are world stock indices, why they are needed and how they can be used when managing personal finances. Surely many have heard and read in the news something like “European stock indices are falling rapidly,” “The Dow Jones index fell by 5%,” “trading opened with an increase in stock indices,” etc. So, after reading this article, you will have a clearer idea of what we are talking about and what economic meaning such information carries.
So, first things first.
What are stock indices?
Stock indices(or stock indices) are economic indicators that characterize the cost and change in the value of certain groups of securities. The calculation of the stock index includes securities that are in greatest demand and reliability on the stock market of a certain region (country or group of countries) or a certain sector of the economy in the region. Stock indices are calculated in absolute value, but few people are interested in this in itself; what is much more important is how the index changes: grows or falls.
The emergence of stock indices was influenced by the large-scale development of the stock market. It was necessary to develop an indicator that would well characterize the state of the economy of a country, a group of countries or individual economic sectors, based on the rise or fall in the value of securities of leading issuers. At each individual enterprise, a change in value may be observed, which is facilitated by certain internal reasons, depending on the activities of this specific enterprise. If the same movement in quotes is observed for the majority of companies in the country or industry, this can already be called a trend. It is to identify such trends that stock indices were created.
The first stock index appeared at the end of the 19th century in the USA: its developer was the owner of Dow Jones & Company. To calculate this indicator, the arithmetic average of the share prices of the 12 largest companies was used. To date, this stock index has undergone many changes, but is still one of the most popular and is known worldwide as the Dow Jones Index.
How are stock indices calculated?
A few words about how stock indices are calculated. For calculations here, different average values are usually used (arithmetic and geometric means, simple and weighted, median).
Currently, the most popular way to calculate these indicators is the method of capitalization-weighted average cost of securities. In this case, the resulting value is divided by a certain coefficient (divisor), selected in such a way that the index value is as convenient as possible for perception.
I will not go into detail about the calculation methodology: each index has its own method, and if you wish, you can familiarize yourself with it on other sites.
The calculation and publication of stock indices are carried out by analytical companies and stock exchange agencies. The name of a stock index consists of its letter name or abbreviation and sometimes a number characterizing the number of companies whose securities are taken into account in calculating the indicator (for example, S&P 500, CAC 40, etc.).
The number and list of specific companies whose securities are taken into account when calculating a certain stock index are directly dependent on what goal this index sets for itself and what it should show. As a rule, this list includes enterprises with maximum market capitalization, that is, maximum value. Thus, stock indices imply that the movement in the stock market of the securities of the largest companies is similar to the change in the value of the shares of smaller similar companies, which are neglected when calculating the indicators.
Different methods are used to select companies included in the calculation of each stock index. The most common principles are:
1. Industry– the largest companies in a particular industry are included in the calculation of the indicator;
2. Regional– the calculation includes the largest companies in different industries of the same region.
Each exchange that publishes stock indices also contains information about the methodology for their calculation, so anyone can always familiarize themselves with it.
In addition to the absolute value of indicators and their dynamics, exchanges also publish trading volumes (the total turnover of securities included in a particular index).
The most common world stock indices.
Now let's look at the most popular and frequently used world stock indices. Each world region has its own, so from the very beginning we will divide them according to regional criteria.
US stock indices.
1. Dow Jones– the most common American (and world) stock index, which is determined by using the value of shares of 30 leading US companies. The Dow Jones index is designed to track the industrial part of the American stock market. The enterprises that are taken into account in the calculation of this index cover industrial, transport, communications, food and financial sectors. This includes securities of such world-famous companies as Microsoft, Coca Cola, McDonalds, Intel, IBM, GM, P&G.
2. S&P 500– American stock index, which includes 500 American companies with highest level capitalization. At the same time, the main part of the index is formed by 45 companies. This indicator simultaneously affects all the most popular sectors of the US economy, so we can assume that it objectively reflects the entire American market.
3. Nasdaq is a stock index created by the National Association of Securities Dealers that includes the stock prices of 5,000 companies, primarily in high-tech industries. The decoding of the name of this indicator indicates that an automatic quote calculation system is used in its formation.
European stock indices.
1. Stoxx 600– a stock index that includes the value of securities of 600 companies located in 18 European countries.
2. FTSE 100– One of the most influential European stock indices. This indicator includes securities of 100 companies, mainly innovative industries with the largest capitalization, listed on the London Stock Exchange.
3 DAX– The most important stock index in Germany, which includes 30 companies from different industries. It includes such corporations as Adidas, Henkel, D&G, BMW, Commerzbank, Volkzwagen.
4. CAC 40– The most important stock index in France, which is calculated using shares of the 40 largest companies publicly traded on the Paris Stock Exchange. In terms of industry, this indicator includes heavy industry, banks, hotels, aerospace, and telecommunications. The most famous are BNP Paribas, AXA, Credit Agricole, L`Oreal, Renault.
Asian stock indices.
1. Nikkei 225– one of the key stock indices in Japan. It includes shares of 225 enterprises that are most actively traded on the Tokyo Stock Exchange, the so-called. "blue chips". Moreover, the list of companies taken into account in the calculation of this indicator is subject to annual revision. This index is widely used to identify trends throughout the Asian continent. It includes companies such as Honda, Mitsubishi, Mazda, Panasonic, TDK, Toshiba, Sharp, Sony, Casio, Canon, Nikon, Olympus.
2. Topix– an Asian stock index, the calculation of which includes securities of companies with the largest capitalization listed in the 1st segment of the Tokyo Stock Exchange.
3. Hang Seng- the most important stock index in Hong Kong, which includes 34 leading companies in the country, representing 65% of all securities listed on the Hong Kong Stock Exchange in terms of capitalization. The predominant industries are finance, real estate, energy and multi-industry corporations.
Russian stock indices.
1. RTS– Russian stock index, determined by the price of shares of Russian issuers that have the highest liquidity and are traded on the RTS stock exchange. 50 companies are taken into account, including enterprises in the oil and gas industry, telecommunications, metal mining and metal processing, retail trade, electric power industry and financial sector. This includes companies such as Aeroflot, Gazprom, VTB Bank, Sberbank of Russia, Tatneft, KAMAZ, LUKoil, Norilsk Nickel, etc.
2. MICEX- the most important indicator of the Russian stock market, which includes the most liquid shares of the 30 largest issuers listed on the Moscow Interbank Currency Exchange. Among the most prominent representatives of the companies included in this stock index are the same companies that are used in calculating the RTS index.
Many world stock indices have their own varieties, each of which includes its own characteristic features.
It cannot be said that some stock indices are more correct, accurate and necessary, and some less so. It all depends on what exactly needs to be analyzed: based on this, you should select a stock index that most accurately characterizes the request.
How to use stock indices?
Now a little about how to use stock indices, who needs them and why.
What is much more important is not the absolute value of the index, but its dynamics, as well as the trading volumes of the securities included in the index. Therefore, in order to carry out analysis and make some investment conclusions, it is necessary to consider stock indices in dynamics. That is, attention should be paid to the size of the percentage deviation of the indicator from the previous value, as well as to the direction in which this deviation was made (increase or decrease).
1. Stock indices are a very clear source for obtaining general information about trends in the economies of countries, separate groups countries or individual industries. Such information will be very useful and even necessary in the stock market and other stock speculations.
2. Even if you do not make money from speculation or invest in securities, analyzing changes in stock indices will give you an idea of how other investors behave in the market, how they assess investment risks in combination with the returns of various financial assets. For example, if stock indices are rising, it means that investors are buying securities of this state and industry; if they are falling, on the contrary, they are selling.
3. The dynamics of stock indices are inextricably linked with the dynamics of currency quotes, precious metals, and other exchange assets, so they can serve as a good indicator for making investment decisions on the input or withdrawal of capital from other assets.
4. If we consider the dynamics of stock indices in the long term, then we can draw conclusions about the general investment climate in a state or region. If stock indices fall, it means that the country’s economy is in decline, the investment climate is worsening and vice versa.
5. Securities are quoted on international markets, whose quotes are based on the values of world stock indices. Thus, by trading them, you can trade the indices themselves and make money speculatively on stock indices in the same way as on currencies, stocks and other financial instruments.
Now you have an idea of what global stock indices are, what they represent, and how you can use this information in your trading. Stay tuned, stay tuned and improve your financial literacy. See you in new publications!
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