Every day, millions of different assets are sold and bought on exchanges from different countries and continents. Seeing the big picture in a huge multidirectional movement of quotations is very difficult. To assess and measure the main trends characterizing the market situation, use exchange (stock) indices .
Assets combined into an index form an “index basket” . Its components have a different direction and dynamics. It is difficult for a trader to see the situation as a whole in order to make a correct, informed decision. The main purpose of using indices is to see the “collective mood” of the market, the prevailing trends in individual sectors of the economy, industries, and regional markets.
Stock indexes combine information on the movement of certain groups of assets and are markers of market sentiment. At the same time, changing the indices can become a driver and force an increasing number of participants to join a given scenario.
Various indices reflect the state of individual market segments – industry markets (transport, industrial goods, telecommunications, services, health care, housing, finance), debt markets, etc.
Evaluating the movement of indices , investors have the opportunity to see which sectors of the economy are in a state of intensive growth, and in what areas there is a slowdown or a decline.
The most popular and oldest index – Dow Jones Industrial Average index (the Dow Jones Industrial of The the Average, the DJIA) .
History of creation
Exchange trades are like chaos . Charles Dow made an attempt to streamline information and find patterns in 1884 . He had the idea to evaluate the daily movement of shares of various issuers with a single meter . For this, he calculated the arithmetic average of stock prices of nine railway and two industrial companies. Initially, Dow did not publish his calculations, but used it exclusively for analysis.
Charles Dow announced the index on May 26, 1896 .
Since then, investors and brokers have a tool that allowed to see and evaluate the overall picture of what is happening in the market. When the index updated highs , on Wall Street understood – the advantage on the side of the bulls . When the lows were updated , it became clear that the bears were stronger .
Over time, the structure of the index and the number of companies taken for the calculation changed many times.
Since 1928, the DJIA has combined the shares of 30 leading American corporations , and since then this number has remained unchanged.
The composition of the DJIA is revised in accordance with changes in the market situation . DJIA brings together the leaders of the American economy. The share of the index shares is approximately 20% of the market capitalization of all US stocks .
Over its more than a century-old history, the index has grown from an initial value of 40.94 to a maximum of 2018 – 26,616.71.
Today, the index structure is very different from the original version. In addition to industrial companies, it also includes major financial corporations, such as The Goldman Sachs Group , Inc. , American Express Co. , JPMorgan Chase and Co. Technology Sector Companies – Apple Inc. , International Business Machines Corp. , Microsoft Corp. The representatives of the entertainment industry – the Walt the Disney Co . and representatives of other fields of activity.
The focus of experts is also on transport and utility indexes :
– The Dow Jones Transportation Average (DJTA) – it includes railway companies, air transportation, road transport and logistics companies;
– The Dow Jones Utility Average (DJUA) – combines utilities. Analysts are closely watching the dynamics of this indicator, as it is very sensitive to the slightest market fluctuations, and often its reaction is ahead of other indicators, heralding future changes.
Charles Dow calculated his first index for a very small, by modern standards, the number of companies – eleven . He had the minimum amount of time and computation to calculate a simple arithmetic average of quotes at the end of the day.
Later, experts reviewed approaches to index calculations. Since the structure of the share capital of index companies may change as a result of splits and consolidations, a special divider has been introduced. This allows you to get a more objective result and avoid its distortion.
S & P500- Index
The S & P500 includes five hundred shares of the largest corporations by capitalization represented on the NYSE and NASDAQ . It is believed that it most objectively reflects the market situation.
S & P500 is an important indicator of the American economy. The indicator is calculated taking into account the share of market capitalization of issuers in the index.
Index futures under the ticker symbol SP is one of the most sought-after speculative CME instruments.
The S & P family of indices is quite large and diverse – these are sectoral indices, indices of companies with small and medium capitalization.
Historically, NASDAQ has evolved as an electronic platform where companies operating in the Hi-Tech field were represented . The exchange itself took the first steps in its development and provided access to trading with loyal listing conditions to young companies that mastered the newest areas of activity. Exchange quickly gained momentum. Now NASDAQ is the second largest marketplace in the world .
World Leaders – Adobe Systems Incorporated , Apple Inc. , Google Inc. , Microsoft Corporation included in the NASDAQ index.
NASDAQ Composite unites more than 3 thousand shares of high-tech companies from America and other countries. This is a composite index that is represented by all issuers listed on the NASDAQ. According to the movement of the NASDAQ index, one can judge about the changing market conditions of innovation and high technology.
The NASDAQ100 includes one hundred technology stocks that are not in the financial sector, issuers from different countries are allowed.
NASDAQ sectoral indices unite enterprises of one field of activity – banks, biotechnologies and pharmaceuticals, computer technologies.
Russell 2000 Index
Investors consider Russell 2000 – an index of small-cap companies, one of the best indicators of the stock market . Many small firms work in cooperation with large enterprises. Any changes in the market immediately affect the activities of small companies, as they are more sensitive and less resistant to market fluctuations. The fall of the Russell 2000 index triggers a response from large companies, whose shares are also starting to decline. Experts have long noticed that a steady decline in Russell 2000 precedes the subsequent decline in the market and use this when forecasting .
The most informative for European investors are the German DAX 30 , the English FTSE 100 and the French CAC 40 .
The DAX30 index includes securities of thirty largest corporationsrepresented on the Frankfurt Stock Exchange. The indicator is important for understanding the processes of the economies of EU countries .
The FTSE 100 Index includes the 100 largest capitalized companies of the London Stock Exchange (LSE) . This is one of the most “authoritative” indices in Europe.
Nikkei 225 – index of the Tokyo Stock Exchange , includes shares of 225 leading companies such as Honda , Mazda , Panasonic . Nikkei occupies a leading place in assessing and forecasting the state of the economy of the entire region .
Equally important for an understanding of the economic status of a region is the Hang Seng index of the Hong Kong Stock Exchange. In the calculation of the index involved shares of 34 major corporations . Since 1985, four sectoral indices have been introduced – financial, energy, industrial and real estate index.