What is an index?
Chapter 1: Introduction
Whether it's a TV news report or a financial column, the term stock market index often appears. So, what exactly is an index? And why is it so important?
Have you ever heard experts mention London FTSE 100 index, US S & P 500 index, Dow Jones Industrial Average Index, Hong Kong Hang Seng index, Germany's DAX index, France's CAC index, euronext and other indices?
The reason they are mentioned so frequently is because these indices are barometers and indicators of many major events, such:
- Stock Market Trading Confidence
- Business confidence
- The state of operation of the economy
- Stock Investment Status.
The rationale is that when investors (e. G. Pension funds, insurance companies, investment funds and individual investors) are bullish on the stock market, they buy a lot of shares, when the overall level of share prices tends to rise;
If investors are not bullish on the stock market, share prices tend to fall. That's because investors are dumping stocks for cash or other investments.
This view is true, but it is only a simple view of the index. In fact, many other factors also affect stock market behavior. For example: changes in interest rates, state budgets, political events, trade and economic form announcements, etc. This is why it is difficult to accurately predict the future direction of the "market.
Chapter 2: How are indices compiled?
Index(Also known as a "stock index") is compiled from the stock performance of a group of listed companies carefully selected by a public stock exchange.
For example, London's FTSE 100 index is based on the performance of the 100 largest companies listed on the London Stock Exchange by market capitalization. Market capitalization is calculated as the total number of shares issued by each company multiplied by the price per share.
These large companies are also known as "blue chip" companies. The level of the index should be calculated to reflect the overall price change of each company and is expressed in points or percentages.
A similar approach is used for other indices. The S & P 500 index covers the 500 largest companies listed on the New York Stock Exchange or Nasdaq. The Dow Jones Industrial Average ("Dow") is composed of the stocks of the 30 largest companies listed on the New York Stock Exchange or Nasdaq.
These companies are included or removed from the index list as their market capitalization rises or falls. The Exchange regularly reviews index companies to ensure that they qualify as index members. In addition, the London Stock Exchange publishes SME indices such as the FTSE 250 and FTSE 350 indices, which are compiled in much the same way.
Chapter 3: How to Invest?
When investing in an index, investors can choose to buy "tracking" index funds (I. E., holding the exact same stocks as the index constituents).
Investment funds (including mutual funds) manage this process and invest on behalf of their investors. The fund manager also helps investors collect and distribute (or reinvest) the dividends paid by the corresponding stocks and receives a fee from them.
There is also an increasingly sought-after form of index investing, namely exchange-traded open-end index funds (ETFs). ETF funds have relatively low management fees and the buying and selling process is simpler and more convenient.
In addition, there are numerous index derivatives that you can buy options or futures on the corresponding stock index (e. G. FTSE 100 and/or S & P 500). Essentially, these tools are either used to hedge against fluctuations in stock index levels or to guess the future direction of stock index levels, depending on your investment objectives.
