|Stock Exchange (bourse):||An organization where shares are traded and contracts are administered. An exchange usually includes a primary market, where shares are first issued by companies seeking financing, and a secondary market, where they or derivatives based upon them can then be traded.|
What are Stock Indexes
Stock Indexes - text
A stock market index measures the value of a specific section of the stock market. A stock index takes a number of different companies stocks and groups them together so they can be traded as one financial instrument. An index therefore captures the performance of these stocks as one number.
Stock indices are calculated from the prices of these selected stocks and are usually weighted. They are a tool used by investors and traders to describe the stock market, and for comparison purposes between different sectors of the market. When investors are referring to the performance of ‘the market’ they are referring to the performance of a stock index.
A stock index itself is just a mathematical construction to measure the performance of the stock markets. It cannot be invested in directly meaning investors cannot own a stock index directly like they can shares.
Instead, investing in stock indices is made accessible through exchange-traded funds (ETFs) which track the performance of the index or through derivatives such as option and futures contracts. Futures contracts of stock indices are the instruments we trade with our broker. These instruments are based on the underlying price of the index and will move in line with them.
The first ever ETF to track an index was the S&P500. This was developed to track the performance of the 500 largest companies in the US. Now, there are literally hundreds of ETFs and futures contracts which track different groups of stock.
Stock market indices may be categorized in many ways. A ‘world’ or ‘global’ stock index is made up of companies irrespective of where they are based or traded.
A ‘national’ index’ represents the performance of the stock market in a given nation and therefore reflects investor sentiment on the state of its economy. The most regularly traded national indices are made up of the stocks of the largest companies listed on the nations stock exchanges. Examples include the US S&P 500, the Japanese Nikkei 225, and the UK’s FTSE 100.
Stock indices can also represent the performance of companies of more extensive geographical regions. The DJ Euro Stoxx 50 consists of the stock of 50 blue-chip companies based in the Euro Zone only. The MSCI Emerging Markets Index is made up of stock from emerging economies only such as Brazil, Mexico and South Africa.
Finally there are unique indices that relate to certain industry sectors. The NASDAQ 100 for example primarily consists of companies in the technology industry and totally omits financial companies. The point is that there are hundreds of different types of indices which measure the performance of stock in different sectors and areas.
However, most traders focus on the main national indices we mentioned previously.