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What are Indices?
You thought we were done with the trading assets available? We’re only getting started!
In this article, we’ll be looking at indices. Let’s begin!
So, the first thing you should know is that a market index is a collection of shares from either a specific sector or the stock market in general.
For example, the Dow Jones Industrial Average consists of shares of 30 large US companies listed on NASDAQ or the New York Stock Exchange. It is a very popular index as it tracks the performance of the stock market and the US economy in general. Now, the S&P 500 is another popular index that consists of 500 large-capitalization US companies which are also used to gauge the performance of the stock market and the economy.
Which one is better?
Well, the S&P 500 is preferred by many as it contains more shares.
Another factor is the calculation method used in these indices.
Dow Jones is a price-weighted index where the S&P 500 and most other market indices are calculated based on the market capitalization method:
The S&P 500 Index is calculated in 3 easy steps:
- Estimate the market capitalization for each company as the product of the number of tradable shares multiplied by the current value of one share.
- Then sum up all 500 market capitalizations to get the total market capitalization.
- Finally, divide the total by the S&P 500 divisor to get the index. Don’t worry about the divisor, it’s just a number to keep the index consistent!
Not that hard after all, right?!
Of course, there are more indices, and not just these two. Other popular indices are:
- Financial Times Stock Exchange Index 100
- DAX (the Frankfurt Stock Exchange)
- Nikkei 225 (the Tokyo Stock Exchange)
- NASDAQ Composite (IXIC)
- Shanghai SE Composite Index (the Shanghai Stock Exchange)
You now know what indices are!
