All you want to know but never asked about the stocks and options markets.

jueves, 28 de agosto de 2014

Stock Market Indices

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A stock index corresponds to a compound statistical record, usually a number, which tries to reflect changes in the value or average returns of the component stocks. Generally, shares in the index have common characteristics such as belonging to the same stock exchange, have a similar market capitalization or belong to the same industry. The stock indices are usually used as a reference point to different portfolios such as mutual funds.

The purpose of stock indices is to reflect the evolution over time of the prices of securities listed on a stock exchange. In short these instruments try to reflect the performance of all companies listed on the stock taken together like a single unit values.

Like shares, stock indices are traded on major stock markets.

Importance of stock market indices

The importance of stock indices lies in the ease of handling of information, in other words those involved in the stock market do not have to remember great price lists nor exaggerated amounts of information because with a single number they can summarize market behavior for a day; this provides less effort in understanding the stock markets.

Similarly, the indices are not merely theoretical applications as each index is based on the actual behavior of the stock market which provides a much safer panorama for decisions.

Objetives of stock indices

  • Provide investors and analysts with a tool for easy understanding and impartial decision. 
  • Keep a record of the movement of cash transactions. 
  • Analyze by comparing records from different periods. 
  • Relate different investment instruments in a single measurement parameter. 
  • Providing a panoramic image of the entire stock market movement without having to analyze the detailed operations. 
  • Represent the evolution of a particular market. 
  • Trying to summarize the general behavior of prices in a figure that is easy to read, analyze and understand.

History of stock market indices 

The former American index existing today is the Dow Jones Industrial Average or simply known as Dow Jones. This index was created by Charles Henry Dow in conjunction with the Wall Street Journal to measure the economic and financial activity in the United States of America in the late nineteenth century. At first it was composed of only 12 companies such as General Electric, North American Company, American Tobacco Company and others, while today consists of 30 companies. 

Stock indices construction

In terms of construction, market indices can be classified into 3 types: 
  • Arithmetic type where the simple addition and subtraction is used for its calculation, assigning a standard score to the instruments or companies that are taken into account for the calculation thereof, and then performing a summation or simple subtraction to find the possible variations. 
  • Geometric type where the calculations used are percentage multiplication and division of points assigned to the instruments and selected companies. 
  •  A combination of both metrics performing alternated operations  between arithmetic and geometry. The veracity and objectivity of each will depend on many factors.

Stock indices in the world 

The major stock indexes of the world are: 

Europe 

  • Ibex 35 (Madrid, Spain) 
  • FTSE 100 (London, UK) 
  • CAC 40 (Paris, France) 
  • DAX 30 (Frankfurt, Germany) 
  • FTSE MIB (Milan, Italy) 
  • AEX (Netherlands) 

Asia 

  • Nikkei 225 (Tokyo, Japan) 
  • Hang Seng (Hong Kong) 
  • Kospi (Seoul, South Korea) 

America 

  • Dow Jones (New York, USA) 
  • Nasdaq 100 (New York, USA) 
  • S&P 500 (New York, USA) 
  • Stock Exchange and Assumption Products (BVPASA) (Paraguay) 
  • Bovespa (Brazil) 
  • STI (Argentina) 
  • IGBC (Colombia) 
  • IPSA (Chile) 
  • General Index (Peru) 
  • IPC (Mexico) 
  • IBC (Venezuela)

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