Stock index : definition and overview

You are probably familiar with stock market shares. A stock – also called shares or a company’s equity – is a financial device that marks ownership in a company or corporation and represents a proportionate claim on its assets and profits. But what about a stock index?

Definition of stock market indices

A stock index can be defined as a group of stocks that measures the overall performance of a market. Stock indices help investors assess the state of the markets and compare the performance of specific investments. There are many different stock market indices.

How does it work and why are they important?

Stock market indices are significant to the international financial markets. They help investors value stock market performance. Indices also serve as a benchmark for stocks, as actively managed funds use them to compare fund performance.

Stock market indices have no inherent value and evolve along the price of the stocks that make up the index. Therefore, a stock index is always accompanied by a percentage value that indicates its rise or fall.

There are two ways to calculate this percentage :

Generally, an index is calculated by adding up the market capitalization and dividing the resulting figure by 100 or 1000. Clearly, the larger a company is, the more weight it has on the evolution of the market index. The CAC 40, for example, is calculated on the basis of this weighted average.

But this method is not the only one available. The Dow Jones index, for example, is calculated differently. The calculation is weighted according to the average share price. The higher the price of a stock, the more impact it will have on the index as a whole.

Main US indexes

  • S&P 500

The Standard & Poor’s 500 is one of the main stock market indexes in the United States. This index represents the 500 leading U.S. publicly traded companies, with primary emphasis on market capitalization. The S&P is a float-weighted index and you cannot directly invest in it, but since it is an index you can invest in one of the many funds that use it as a benchmark, tracking its composition and performance.

It is possible to invest in the S&P500 via ETFs, on the Market-Signals website for example.

  • Dow Jones

Created in 1896 by Charles Dow and considered to be the oldest stock market index in the world, the Dow Jones tracks 30 large, publicly-owned companies trading on the New York Stock Exchange (NYSE) and the Nasdaq. Most of the stocks come from the industrial sector. Often referred to simply as “the Dow,” the DJIA is one of the most-watched stock market indexes in the world

  • Nasdaq

Created in 1971, the National Association of Securities Dealers Automated Quotations groups 3,000 technology stocks listed on the Nasdaq. Composed mainly of technology, internet and telecom companies, it includes companies such as Microsoft, Intel and Apple.

Main international indexes

Here are some of the main international stock market indices.

Examples of European indexes

  • DAX 30

The DAX 30 Index, Deutscher Aktien Index, is the most famous German stock market index. Created in 1988, it represents the 30 largest and most liquid German companies listed on the Frankfurt Stock Exchange. It includes companies such as Adidas, Allianz and BMW.

  • CAC 40

Created at the end of the 80’s, the most famous stock market index of the Paris stock exchange is the CAC 40. CAC is an acronym that stands for Cotation Assistée en Continu. It includes the 40 largest companies listed on the Paris stock exchange. It includes stocks such as Total, Sanofi and L’Oréal. Updated every 15 seconds, its value varies continuously every working day from 9:00 am to 5:30 pm.

The CAC 40 is the most popular index, but there are other national stock market indices such as the SBF 80 (or Société des Bourses Françaises), which tracks the financial dynamics of mid-sized companies and includes the 80 largest market capitalizations other than those of the CAC 40, or the SBF 120, which includes the 40 stocks of the CAC 40 and the other 80 of the SBF 80.

  • BEL 20

The BEL 20 is the most popular Belgian index, providing information on the general share price of twenty companies. Companies listed in the BEL 20, subject to specific criteria, do not have to be Belgian, but must be active in Belgium.

  • IBEX 35

The Ibex 35 is the main stock market index of the Madrid Stock Exchange. It is composed of the 35 largest market capitalizations among the major Spanish companies.

Other main indexes

  • FTSE 100

The Financial Times Stock Exchange is the British stock market index. This index takes into account the 100 British companies listed with the highest capitalization. It includes companies such as HSBC, Rolls-Royce, Barclays and Aviva.

  • Nikkei 225

Finally, on the other side of the Pacific, we find the main index of the Tokyo financial center, the Nihon Keizai Shinbun. Created in 1949, this index is composed of the 225 major companies listed in Japan.