If you’re anything like I was when I first started learning about the financial markets, you’re probably coming across a lot of unfamiliar vocabulary. One of the terms that was the most foreign to me at the time was ‘Index’. Also known as a Market Index, Stock Index, or Indices (plural). If you too have run into this issue, don’t worry. Today, I’m going to delve into the world of Indices.
An Index is a theoretical investment portfolio representing a specific segment of a financial market. In other words, a Market Index is a predefined collection of financial assets within the Stock Market, used to provide a broad depiction of the current trends within the economic sector. Investors adopt Indices to gauge overall market movements and performance, in order to manage their portfolio.
An Index is calculated based on the combined value of all underlying assets within the Index. There are different methods used to calculate an index, which is determined and maintained by the provider of the Index. Each individual asset has an impact on the strength or weakness of the Market Index. Assets are weighted differently, meaning that the impact each financial instrument has on the Index can vary. Indices can have values based on fundamental-weighting, revenue-weighting, market-cap weighting, and float-weighting.
Unlike other financial markets, it is not possible to purchase a portion of an Index, as it is only hypothetical. There are multiple ways that Investors can speculate on a Stock Index including Index Funds, ETFs, and CFDs. Even though you cannot invest directly in an index, it is still a popular option among traders as it allows traders to diversify their portfolios.
There are almost 50 major Stock Indices that can be divided into three categories: global, regional, and national. Global Indices like FTSE All-World Index, S&P Global 1200 Index, and Dow Jones Global Titans 50, track markets globally. A regional Index cover specific geographical areas such as Europe, Asia, or Latin America. Some examples of common regional Indices are Euro Stoxx 50 Index and FTSE ASEAN 40 Index. National Indices are used to represent the strength or weakness of a market in a specific country. Some of the most popular national Indices are the Dow Jones Industrial Average, S&P 500, DAX 30 Index, and Nasdaq.
To conclude, an Index is a theoretical predetermined grouping of Stocks within a specific sector of the market. An Index itself cannot be bought or sold, however, it can be used to assess market conditions. It is also common for investors to speculate on Indices with ETFs and CFDs.