In fact, the term "stock market" includes a lot more meanings than most people think. This is not just market trading in securities. It is possible to analyze the state of the stock market, the level of foreign exchange trade, an individual economic sector, the entire economic system of a country as a whole by such important criteria as stock indices. These numerical indicators can reflect the actual situation and dynamics of the bond market, stocks, the state economy system or any of its industries, taken separately.
The value of stock market indices
One of the main misconceptions that can often be heard is that stock indices Securities - an object of trading on the stock exchange. However, as a rule, such indicators are calculated by specialized rating and information agencies, major financial organizations and banks. In addition, the issuance of their own stock index by various companies has acquired an upward trend, as this is often associated with the general prestige of the corporation.
It is important to know how things are in the stock market. In general, only specific stock indices can characterize the behavior of trading assets in the world or in some countries.
Received statements indicate the level of development of economic relations of the state. In particular, for potential investors, the corresponding indicators determine the share of probability of success in the case of the direction of financial flows in any area.
Purpose and task of stock indicators
The stock market indices can be described as follows. For the convenience of tracking all government securities simultaneously, summarizing reflectors of the market situation have been developed, which, by averaging a lot of numerical indicators, display further information in a more accessible form.
Initially, the developers of the relevant indicators were tasked with compiling an indicator that accurately indicates the speed of movement and the vector by which stock quotes are sent. Futures and stock indices are also driven by this movement. For example, the cost of oil is increasing, which leads to an increase in the quotes of all corporations involved in the oil industry. At such a moment, one can observe not only the growth of securities of various companies, but also a decline. In accordance with the movement of these indicators, stock indices do not stand still.
The first ever Dow Jones index
Observing their dynamics, it becomes much easier for all bidders to assess the impact of events on an individual industry or the entire market. Without the availability of indices, it would be necessary to monitor a lot of quotes - stocks, bonds, including and currency quotes ("Forex").
Futures, stock indices, in any case, would have to be invented. But, as you know, this happened at a time when trading on the stock exchange acquired tremendous proportions both in financial market turnover and in the number of participating companies.
At the end of the 19th century, the first American stock indices appeared on the stock exchange. In 1884, Charles Dow compiled an indicator representing the quotes of securities of more than 10 largest transport companies in the United States. All of them had a fairly large cash turnover in the stock market. The index was almost unanimously adopted by all participants in exchange trading as the main calculated indicator, having received wide popularity and distribution.
How to calculate stock indices?
Methods of calculating the main indicators of the stock exchange imply the very well-reasoned correct method, which will fully reflect any ongoing processes on the stock and bond markets. At the same time, it is important that the result obtained minimally depends on such factors as the corporate policy of individual organizations, pricing using various financial instruments. Indices US stock market taken as a sample are calculated taking into account the further interpretation of the changes occurring during the bidding process. Important points here are:
- suitable formulas for calculating these indicators;
- the accuracy of the information used in the calculation;
- the regulated procedure for amending the basic calculation formula in the event of new circumstances, corporate news and exchange conditions.
Forex Indices
In addition, it is worth noting that each trading platform has its own separate index. Given that stocks and bonds are conventionally divided into two groups, the first, monetary, includes those securities that are in the hands of individuals and do not take any part in the turnover of the exchange. To the second - that kind of papers, thanks to which on capital market the main rotation of capitals, i.e., stocks, takes place.
The Forex index (the international bankless currency exchange market) also has a special calculation formula and allows you to carry out the most profitable trading operations, often using, in addition to the Dow Jones, another Standard & Poor’s 500 index.
This exchange indicator leads the group of indices used in the Forex market. Includes quotes of more than 500 capitalized powerful companies. American stock indices highlight this indicator, recognizing it as the most popular among traders and managers.
It should be noted and DXY, or USDX. This indicator serves as a direct proportional reflection of the dollar’s position relative to the most influential currencies in the world, including the euro, Chinese yen, Swedish krona, British pound, Swiss franc and Canadian dollar.
In addition, US stock indices, unlike stock indicators of other countries, are of most interest to participants in the global stock market. This is primarily due to the fact that the level of capitalization in the markets of America is much higher. Secondly, the behavior of securities of some corporations in certain regions has a significant impact on the rest of the trade.
4 ways to calculate stock market index
It follows that the fundamental calculation methods used to obtain the aforementioned stock indices can be divided into 4 categories.
The first method is to find the unweighted arithmetic mean. It is it that is used in calculating the Dow Jones Industrial Average.
The next method is calculations by the method of the opposite weighted arithmetic mean value. In this case, weights can also be used that are derivatives of the indicated method:
- at the cost of securities in the sample;
- at the cost of the sample itself;
- by comparing and equating the weights of corporate securities.
The authoritative rating agency S&P 500 uses the described methodology to calculate the corresponding index.
The third method is the values obtained by unweighted geometric progression.
One of the oldest stock indexes FT-30 Share Index, published in the UK in the mid-40s of the XX century, is calculated using this method.
The fourth method includes mathematical operations with stock quotes obtained by a weighted geometric mean value.Specialists calculate the Composite Index Value Line Composite Average, resorting to the use of this method.
Particularly noteworthy are the requirements put forward by specialized news agencies and services in calculating indicators. In this case, the main condition is to enter only reliable information and the most complete data that meets the following criteria:
- sample size (the larger the number of organizations considered, the less likely the deviations and errors of the final result will be lower);
- indicativeness of the selected list of companies (so that stock indices can reflect the position of a particular economic segment as much as possible, the sample should have a complete list of organizations whose stocks and bonds are included in the index of the indicated industry);
- share weight (the value of securities must have such a weight that will be proportional to their effect on the exchange);
- an objective approach to the financial statements provided (publicly available information about current changes in the pricing policy for some financial instruments is the basis for compiling indices throughout the trading day).
How was the oldest stock index obtained?
On the example of one of the first American indices - the Dow Jones - we can examine in more detail the methodology of its calculation. Initially, it contained 12 shares, so since 1896 the arithmetic mean value of these securities was deduced. To obtain a stock indicator, this method was quite simple and convenient, especially since the invention and the appearance of the first electronic computers was still a long way off. Meanwhile, to date, the vast majority of stock indexes are calculated according to a similar scheme. However, some changes appeared in this mechanism.
Now the advantage belongs to calculations by the weighted average, while recently only the method of obtaining the index using the arithmetic average was used. A significant difference here is that absolutely any component of the sum has a coefficient of influence here. Stock indices in this case are more dependent on more expensive stocks. For example, a security worth $ 40 has a lot more influence on the final indicator of the indicator than a stock or bond, the price of which is $ 20. Since this particular calculation option requires large computational resources, it also provides more accurate data, therefore, as a rule, the weighted average method is used to obtain exchange indicators.
Asian stock exchanges
It is worth noting that, in comparison with the stock markets of the United States and Europe, Asian exchanges can be called quite young. They began to form more actively only in the post-war period, closer to the middle of the 20th century. It is known from history that the eastern regions developed separately from the world community. However, after the 50s, when the economies of China, Japan, and South Korea began to grow rapidly, these countries became full-fledged international participants in the financial market.
Among the major financial centers in Asia, Shanghai and Hong Kong securities markets, as well as China's stock index, require more detailed consideration.
Shanghai Exchange
Despite the fact that China has more than 15 active exchanges, Hong Kong and Shanghai are considered the central players in the financial industry.
The Shanghai stock market is considered the largest in China. A distinctive feature of the Shanghai Stock Exchange is that it is state-owned, and financial activities are regulated and controlled by the China Securities Commission. More than 800 capitalized companies, whose total capital is estimated at approximately $ 280 billion, are participating in the auction on this exchange.Moreover, the direct trading volume is about 116 billion dollars.
The main index of the Chinese stock market in Shanghai is SSE Composite. Its task is called an objective reflection of the price dynamics of the securities of all companies listed in the listing of the exchange. The well-known SSE 50 - the blue chip index - is also being calculated in Shanghai.
Hong Kong Stock Market
Of secondary importance is given to the stock market, located in Hong Kong. Occupying a separate administrative-territorial district within the Republic. The Chinese stock market index here is Hang Seng. Demonstrating the dynamics of growth and falling prices of bonds and shares of the 35 largest corporations, this indicator is recognized as the main indicator on the Hong Kong stock exchange.
The specified financial market confidently takes the sixth position in the number of capitalized companies participating in the auction. In its own listing, the Hong Kong Stock Exchange has more than 1,750 corporations with nearly three trillion total capital. The trading turnover of this market is about 500 billion dollars, and almost two-thirds of the volume of the entire range of securities in the specified administrative region.
Benefits of Exchange Index Indices
Studying the dynamics of changing some indicators of stock indices by others, you can use the information obtained to identify changes in investor sentiment. Thus, they are able to adequately assess the risks and profitability of their own investments in various instruments. Thus, an increase in the indicators of the main stock exchange indicators indicates a positive mood for investors - they consider the transaction to be successful at the moment and believe that they will be able to sell the acquired shares before the start of the price reduction of the asset.
If we take into account the long time periods, the movement of stock indices can characterize the investment policy in the state, namely, it will tell investors about the possible risks or security of monetary investments in bonds and stocks. In addition, in modern stock markets there are many securities where the values of the indices are the basis of quotations.
Forex quotes are no exception. Stock indices in both cases are derivatives of the market.
Why invest in indexes?
Financiers highlight the following advantages of investing in stock indices:
- Index growth is inevitable.
- Stock indices can affect the state of the stock market of the state and the entire economy.
- Purchasing indices involves relatively low costs.
- There is always the possibility of a high level of investment liquidity.
- Stock indicators contribute to the support of the national currency.
- Unlike stocks, bonds and other securities, indices allow you to participate in the process of scientific invention and production of innovative technologies.
- They provide a reliable level of protection against all kinds of risks on the exchange.
- Investments in these financial instruments do not require “baggage” of knowledge about the history, specifics of stock market activities and mastery of tools.
In simple words, we can say that a stock or stock index is a conditional number, a value. The movement of such an indicator in dynamics is of particular importance, while an increase or a sharp drop in stock indices exposes the general state of the economic component in a country, region, about the heyday of the business or its decline. Exchanges, brokerage houses, news agencies, print media and consulting firms constantly publish a lot of stock indexes that help investors decide to implement large-scale investment projects.
