Stock indexes, what is it?
An essential tool for the good portfolio management, a stock index is a statistical measure calculated by combining several companies’ security values.
Calculated by US corporations such as Standard and Poor’s, Dow Jones, Goldman Sachs or Morgan Stanley Capital International, equity indices are representative of:
1- either a specific market: the CAC 40 index measures the trends for the largest French companies.
2 –or a particular business sector. The car sector index only includes car and related equipment manufacturers.
3 – or listed companies grouped according to their funding level : large, small and medium-sized listed companies..
Stock market indices are not traded as such because they are not titles themselves. Nevertheless they serve as underlying assets for options or are traded on futures markets. A contract index is adjusted by the difference in future prices and the spot rate of the market index during the period of the contract.
Index equities listed funds (called trackers or Exchange Traded Funds) are on the other hand secured against specific market indexes.
The calculation of stock indices is essentially based on a method of weighting by market capitalization. So, companies with the greatest impact on the change in index are those that have a high market capitalization. However, this calculation rule does not apply to all indices as the Dow Jones and the Nikkei 225 operate differently. Indeed, the value of Dow Jones, for example, expressed in points, represents an average of 30 weighted equities per price for the same shares. So the equity, whose price is high, benefits from a greater weighting, regardless of the market capitalization of the company. Stock index is generally used to measure the performance of a stock exchange or market between two given dates.