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  • What are Stock Indices

    A stock index is a market constructed from a selection of stocks which are:

    ―     listed on an exchange

    ―     located in a specific geographic region

    ―     operating in a specific sector

    An index is referred to as a ‘basket’ of stocks which measures the collective performance of the stocks it contains. Stock indices provide traders and investors with a quick and useful gauge as to the health and performance of an exchange, region or sector.

    Some well-known indices you may have heard of include:

    1.      DJIA (Dow Jones Industrial Average): made up of 30 of the largest companies trading on the NYSE (New York Stock Exchange)

    2.      FTSE 100: tracks the largest companies (by market capitalisation) on the London Stock Exchange

    3.      DAX: tracks the 30 largest companies listed on the Frankfurt Stock Exchange

    4.      Nikkei 225: composed of 225 companies on the Tokyo Stock Exchange

    5.      S&P 500 (Standard & Poor’s 500): composed of the largest 500 companies on the NASDAQ and NYSE

    How are stock indices calculated?

    Most indices are calculated using one of two methods:

    1. Capitalisation-weighted system

    In this method, the greater the market capitalisation of a company, the greater the influence of its share price on the index. Market capitalisation (number of shares issued x share price) is a measure of company size.

    2. Price-weighted system

    This method gives greater weight to the share price of a company: the higher the share price, the greater the influence on the index.

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