A stock index shows the economic development in a country, region or industry. For this purpose, the values of selected stocks are combined into an index value and continuously collected. The selection can be made according to the size of the company, ie usually according to market capitalization or share price, and also according to industries and regions. There are also indices that do not directly describe the development of stocks, but rather derivatives that are dependent on stock prices.
Calculation of the indices
Various methods are used to collect the indices:
- Price index :
A price or price index only takes into account the current Trading UK price. The most famous price indices include the Dow Jones, the Nikkei and the FTSE 100.
- Performance index :
A performance index or total return index is an index that not only takes into account the share price but also dividends and other income from shareholdings. To do this, this income is reinvested in the shares. A price decline due to dividend payments as with a price index is not found with the performance index.
In addition, the individual stocks within an index are included in the calculation to varying degrees. This so-called weighting of the shares is carried out in the following ways:
- Price-weighted index :
Each share contained in the index is represented with the same number. This means that stocks with a higher price have a greater impact on the overall index.
- Capitalization-weighted index:
The Forex Brokers Canada contained in the index have an influence on the index, which is determined by the market capitalization of the company. The higher the market capitalization, the more important the stock is to the index. The weighting in the index is proportional to the market capitalization.
- Balanced index :
In an equally weighted index, all stocks have the same meaning for the index.
As a rule, indices can be managed as a price index and as a performance index, which is also the case in reality. However, you should always know exactly which index you have in front of you so that you don’t get confused. When it comes to the DAX, for example, we always talk about the performance index. However, the DAX is also available as a price index. In order not to draw false conclusions about the market development, one should always compare the same calculation method of the indices with one another.
Advantages of indexes
Indices provide a quick overview of the development of the cfd trading they contain. This enables conclusions to be drawn about entire economies or regions. A single key figure is sufficient to understand the branched construct of economic development.
If an index has come into the focus of the public or financial market participants, it can be used as a leading index. A benchmark index is of vital importance for an economy, region or industry. Since the largest companies are often included in the indices, they provide information about the development of the entire economy. As is well known, large economies such as the USA have a global influence, so that the corresponding index is also used as the leading index.