The stock index is an indicator of the change of the “index basket”, which is calculated using special methods. They help to evaluate a particular sector or market, instantly using the data obtained. This way of investing is characterized by a high level of stability and reduced risk.
What are stock indices used for?
The stock (stock) index helps to track changes in the prices of shares or bonds of one group. They are ideal for people who want to assess the general condition of the stock market. They will be able to save a lot of time, because there is no need to follow every security.
When studying world stock indices, you will need to analyze the main components - stocks or bonds. Each market participant can create a general picture using a set of securities. For his own purposes, he can apply the data obtained during the observation of the dynamics.
The main purpose of the compilation of the indicator is to obtain a tool for determining the general direction and "speed" of movement of stock quotes of specific companies. It displays the development of definitions, fluctuations in the market sector and other elements, depending on the sample.
There are 4 goals for using stock indices:
- conclusion of speculative transactions with the obtained data on the overall dynamics of the market;
- practical application of derivatives with a base in the form of a stock index;
- tracking investor sentiment for further use of data when investing money;
- monitoring investor activity in the financial market.
A significant role in the study of the stock indicator is the ratio to the total number of securities in percent. The impact on a particular stock index increases with the increase in the number of shares in its composition. The amount is calculated as a percentage.
What methods to effectively use to calculate stock indices?
The method of arithmetic mean used to be very popular. Data can be obtained through summation of prices of shares / bonds that make up the base of the market. The result is divided by the number of securities that make up the base of the index basket.
Among the advantages is to highlight the simplicity of the calculation. An additional advantage is the immediate response to market changes. For example, you will instantly find out about the strong fluctuations of stock prices if a crisis begins in the stock market.
This method has a drawback - the lack of scales. The stock index is influenced by expensive stocks or bonds. In working with certain companies, low-cost options show minimal or no impact.
The method of weighted arithmetic differs from the other using different methods of weighing, which help to find the best option. For the calculation, you can use the tools for the cost of assembly, stock price and so on.
Using the method of calculating the geometric average value, you need to multiply the available prices. After calculations, you will receive a specific number from which you need to extract the root of the total amount of securities.
Each participant in the financial market decides for himself which method to use based on the specific situation. If it is necessary to compare data at different times and trace trends, the baseline values should not change. That is, the following components should remain stable in the sample: the number of shares, the list of organizations, and securities included.
What are the most common stock indexes?
On the xStation5 platform, you will find the most well-known stock index in the US market - US30. In 1986 it included the largest industries in the industry, now hundreds of other companies.
On the same platform is the S & P 500 (US500) - another well-known stock index. For the calculations taken data shares of 500 leading companies in the United States of America.
Among other well-known global stock indices are:
- CAC 40. The French indicator FRA40 (xStation5 platform) includes stocks and bonds of 40 largest companies. The variety is impressive - from telecommunications to heavy industry.
- DAX. The basis of the German DE30 (xStation5 platform) are taken shares of 30 corporations. It includes corporate securities of a number of industries, such as automotive and chemical.
- FTSE 100. UK100 (xStation5 platform) consists of securities of 100 companies. Enjoys great popularity in England.
For many investors, the Asian market is of great interest. One of the leaders, the Nikkei 225 (displayed on the xStation5 platform as JAP225), is Japan’s largest stock index, which has a huge impact on the market.
Stock indices are useful tools for financial market participants that can perform various tasks. You only need to take time to study the base - stocks or bonds. To obtain data on a specific index will help the analysis of the dynamics.