What are Indices?
Indices are a quoted measure of the performance of a group of shares from an exchange.
What are the benefits of stock indices and how to trade them?
By measuring the average value of an exchange’s leading stocks, an index can indicate how economic sectors are fairing. Stock indices then represent a benchmark against which a stock’s performance may be measured. The index itself, however, is not a tradeable asset. Instead, one may invest in a derivative – a fund, option or future – that tracks the index’s value. But first, one must fully understand what an index is.
How are indices calculated?
Different indexes are derived in different manners. These are based on two main parameters – how the measured stocks are selected and how the average is derived. An index’s stock composition may be determined based on a company’s market capitalisation, its stock value or by a committee and at its sole discretion. Once those stocks are selected, the index value can be computed based on a simple or weighted average, for example. Now that we understand what indices are, let’s take a look at a few.
Which index CFDs can I trade at 1Market?
The DAX 30 is a capitalisation-weighted index that measures the value of the top 30 companies traded on the Frankfurt Stock Exchange and is owned by Deutsche Bӧrse AG – a publicly-traded company. Covering an exchange that was created in the 11th Century, the first averages thereof were computed in 1625. Frankfurt was also one of the first places to enable electronic trading (in 1969). Selection is based on company size and reviewed annually. The DAX is unique in that it is updated after closing time with futures prices.
The grand-daddy of all indexes, the Dow Jones Industrial Average is 2nd in seniority only to the Dow Jones Transportation Average, the first of which was published in 1896 by the Wall Street Journal, which itself was created by Charles Dow, Edward Jones, and Charles Bergstresser. Dow himself selected which companies to include in his first average, published in 1885 – a task now delegated to a panel of “experts” based on unpublished parameters. The values of the 30 participating stocks are divided by a fixed divisor (currently 0.45798) that is then adjusted to take into account stock-splits, spinoffs, etc. The stocks are taken from amongst the companies listed on the New York Stock Exchange (owned by the Intercontinental Exchange / Euronext) and the Nasdaq (owned by the Swedish Wallenberg Family). Despite its name, the DJIA is no longer limited to heavy industry per se. At present, the DJ is operated by S&P Dow Jones Indices, itself a joint venture that includes the CME Group, News Corp, and S&P Global, which is owned by McGraw Hill Publishing.
The Standards & Poor’s 500 is a “free-float capitalisation-weighted” index. That means that each determining share’s value in the average is determined by the company’s market cap plus the number of outstanding shares held by the general public only (excluding those held by company insiders and the government). The 500 company shares are chosen from amongst all the US stock exchanges by a committee that takes into consideration (but is not entirely limited to) market-cap, liquidity, financial viability, trading tenure, exchange prominence, sector and more. The index is published by Standards & Poor’s – a credit rating agency formed through the merging of Poor’s Publishing and Standard Statistics in 1941, now owned by S&P Dow Jones Indices.
The Nikkei 225 is a price-weighted index that measures the performance of the Tokyo Stock Exchange. It has been calculated regularly since 1950 by the Nihon Keizai Shimbun – the world’s largest financial newspaper. The index constituents are selected based on company liquidity and a desire to maintain a balance between 34 major sectors, including Foods, Pharmaceuticals, Shipbuilding, Banking, Warehousing, Communications and more. They are then reviewed once yearly, non-adequately performing stocks replaced by better-performing ones. To compute the index, each of the 225 stocks included is measured in relation to its stock price and a fixed divisor.