Stock indices

The concept of stock indices

Stock indices help us describe the performance of the stock market or a specific part of it. Given the difficulty of tracking each of the securities that are traded individually, we resort to taking a smaller sample of the market that represents the whole (similar to opinion polls). This smaller sample is called the stock index. It is a statistical measure of changes in a portfolio of stocks that represents a portion of the market as a whole

Use stock indicators

Investors and traders use global stock indices to track the performance of the stock market, as a change in the price of a stock index represents a relative change in the price of the stocks included in the index.

For example, if a stock index rose by 1%, for example, this means that the stocks that make up this financial index also increased by an average of 1%.

History of stock indices

The first stock market index in the world appeared in July 1884 when the American newspaper Charles Dow published the Dow Jones Transportation Index, which included the shares of 11 companies in this field, including 9 railway companies, a shipping company, and a telegraph service company. The average of this index is calculated by summing the prices of all the shares of these companies and then dividing them by the total number of shares of the 11 companies. Then in 1896, Charles Dow, with his fellow journalist Edward Jones, created the Dow Jones Industrial Average, which is still used today.

How are stock indices calculated?

Before the digital age, calculating the price of a stock index had to be as simple as possible, as the Dow Jones Index was calculated using a simple average. These methods of calculation made the index in reality nothing more than an average, but they served their purpose in their time, but today. Advanced methodologies are used to calculate stock indices, such as the weighting method

Advantages of stock indices

Simplifies the research process: Stock market indicators lift the heavy burden for investors who want to know how an industry, economy, or any sector in a country is performing. Instead of having to find related companies and study their performance on an individual basis, investors can instead watch a single indicator. for these stocks.
It allows investors to diversify their investments easily: trading stock indices is an excellent way to diversify investments without having to place thousands of orders.

Disadvantages of stock indices

Stock indices are not always accurate: Although stock indices are designed to simulate a specific market, this does not mean that they are 100% accurate. Just because you are buying a foreign market index in a specific region, it does not mean that your basket will perfectly reflect the economy of that region and many can There are factors that change the course of the economy, and sometimes it is difficult for the stock index to accurately interpret all of these factors

The best traded stock indices

Dow Jones Industrial Average

Indicator abbreviations DJIA – DM30

It is an industrial index for the 30 largest American industrial companies on the New York Stock Exchange and is the oldest index in the world
An increase in the index is evidence that buyers of the shares of these companies (in the index) are more than the number of sellers and is a sign of investors’ confidence in the American economy. A decrease is evidence that sellers of the shares of these companies are greater than the number of buyers and is a sign of a decline in investor confidence in the American economy.
The components of the index may change as they change over time (i.e. new companies enter and old companies exit). The index is specific to the 30 most important companies in the American economy, and all companies have changed over time except for one company, General Electric.

Nasdaq index

The Nasdaq 100 index, or NQ for short, is an American index that is considered one of the most important and famous indices in the global and American stock markets in particular. It is considered the main index of the technology market and companies in the United States.
The index includes 100 large companies that mostly belong to the technology sector, and the most important companies it contains are:

Apple – Google – Tesla – Cisco – Nvidia – Microsoft – Adobe – Netflix – Bay – Facebook – Intel

The NASDAQ differs from the Dow Jones in the following aspects:

The composition of the index excludes financial companies
The index includes non-US companies
The index value takes into account the market capitalization of companies
S&P 500 index

S&P 500 is short for Standard and Poor’s 500

It is a stock index that includes 500 major companies listed in the American market. It is managed by the financial rating agency Standard & Poor’s

The index is considered one of the most followed by investors because it is one of the most globally represented indicators

The S&P 500 was created in 1957 by Standard & Poor’s, a financial ratings company formed in 1941 from a merger between Standard Statistics Company and Poor’s Publishing Company.

The most important companies listed on Standard & Poor’s:

Amazon – Alphabet – JPMorgan – Johnson & Johnson – Bank of America – Tesla

DAX index

The DAX 30 index was established in 1987 and tracks the price performance of the 30 largest German companies in terms of trading volume and market capitalization.

DAX is an abbreviation for German Stock Index in German
As of September 2021, the index number has grown with the addition of ten more of the country’s largest companies and has become the DAX 40 index. This increase in size is expected to improve the quality of the index, while providing a broader representation of the largest companies in Germany, and thus the overall economy.
The index has introduced stricter rules regarding company eligibility for inclusion, and the new DAX 40 index will also be reviewed twice a year compared to the previous annual review of the DAX 30 index.

It is largely believed that the changes in the DAX were in response to the Wirecard scandal in 2019, a member of the DAX 30, in which the company collapsed and filed for bankruptcy after investigations found that about 1.9 billion euros were missing. This scandal negatively affected not only investor confidence At DAX 30 but in German financial markets in general and in response to these events it was decided that it was time to reshape the DAX index and thus the DAX 40 index was born.

The DAX index represents the summary market value of the largest companies in Germany, such as BMW, Adidas, Siemens, and Deutsche Bank, in terms of trading value.

FTSE indicator

FTSE 100 (Financial Times and Stock Exchange)

Known as the FTSE Index, it is an index that includes the 100 largest companies in terms of market capitalization listed on the London Stock Exchange. The index is managed by the FTSE Group.

The FTSE 100 index is similar to US stock market indices such as the S&P 500 in that the index price is calculated using the total market capitalization of its component companies.

As the index rises, it means that the total value of companies in the index (but not necessarily all of them) is rising
As the index falls, this means that the total value of the companies in the index (but not necessarily all of them) declines
The most important economic data affecting the index:

Inflation reports
Employment numbers
Central bank policy on interest rates
Retail sales and consumer spending figures
Currency movements

Japanese Nikkei index

The Nikkei stock index does not receive much media coverage, but it is considered a leading indicator for global markets because of the focus on American and European stock indices. Market traders forget that the Tokyo Stock Exchange is the second largest financial center in the world in terms of market capitalization after Wall Street.
The Japanese Nikkei 225 is the main stock index of the Tokyo Stock Exchange in Japan, and includes the 225 largest Japanese companies. The Nikkei stock index began being listed in 1950.

The Nikkei Stock Average is called the “Japan Index” because it has a significant impact on the Japanese economy, just like the DAX 40 in Germany and the S&P 50 in the United States.

The Japanese Stock Market Index consists of 225 stocks in 35 different industries, of which technology is the largest sector

The Nikkei is calculated via the unweighted average price of the 225 stocks that make up the index

There are distinguished champions at the top of the index such as automakers Toyota, Nissan, Honda and Mazda, and Bridgestone tires in addition to companies in the photographic sector such as Nikon, Canon and Olympus, audio such as Yamaha and Sony, and many electrical and electronic industries including Fuji, Panasonic, Toshiba and many more.

This short list shows the global importance of the companies included in the Nikkei Stock Index