Stock Market Indices: definition & complete guide
Published: March 15, 2021 by Andrew
Within the financial markets, the Stock Market Indices are undoubtedly among the most interesting assets on which it is possible to invest.
What are them? This is a summary of the value of the basket of stocks they represent, or a summary of all the shares of the companies included in the index. The summary can be calculated in various ways and this determines the type of index.
These are real assets, in which it is possible to invest as on any financial security.
Within this guide on stock market indices we will analyze:
- What they are and what types exist
- What are the main existing indices
- What are the platforms to invest in security
As we will discover in the course of the guide, the best way to invest on stock indices is to use brokerage platforms. We will talk about brokers like ForexTB (official site here) that help even beginners to be successful on indices and other markets.
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Stock Market Indices: meaning
The expression “Stock Market Index” has entered common terminology and it is not uncommon to hear about it, especially in newspapers and news programs that deal with finance. However, not everyone is very clear what this concept represents: the stock market index means a basket, that is a collector, which collects the performance of a group of shares that share a certain characteristic (usually the capitalisation of the companies that share them).
This means that a stock market index provides an insight into the general performance of a country, a sector and so on, providing a very useful indication both from an analytical point of view and from an investment point of view.
In addition to being useful for studying the performance of the shares contained within them, however, indices are also valuable because they allow you to invest directly in them, like a traditional asset.
There is only one variant that differentiates investments on indices from those on individual shares. Indices are exposed to lower risks and generally maintain much lower volatility values than individual stocks. Think of the always volatile Juventus, Facebook or Aramco shares.
This is because, obviously, the value of an index is given by the synthesis of the values of the shares that make up the basket, while investing in a share refers to a single asset.
From this point of view, indices offer far better diversification than any other financial security, which is why investing in publicly traded indices is never a bad idea.
Types of Stock Market Indices
As previously mentioned, the type of index varies according to the criteria chosen to create the summary of the values of the shares that represent them. In general, there are 4 types of stock market indices:
- Value weighted indices, are the most common indices, which allow to reflect in a sufficiently likely way the overall performance of the securities represented by the index. This is because the assets have a relevance and a weight proportional to the capitalisation of the issuing company. In this way, a company with greater capitalization will exert a greater influence on the performance of the index prices than one with a lower capitalization, one of these indices is the Chinese SSEC index. This means that the importance of a company within an index varies in correspondence with the events that affect the capitalization, such as stock splits;
- Equally weighted indices, are indices whose prices each share affects as much as the others, regardless of the capitalization of the issuing company or the asset value. This is a less widespread type of index than the value weighted one and the price of which does not likely reflect the overall situation of the basket of equities precisely because the result approaches an arithmetic average of the trends rather than a higher valuation of most influential securities;
- Price weighted indices, in which the influence of a stock on the overall price of the index is directly proportional to its value. Extremely easy to calculate (the value of the index is given by the simple sum of the values of the shares of the individual companies that make up the basket), these indices reflect little or no performance in the entire portfolio. Regardless of the capitalization, the size of the company or the number of shares, in fact, companies with shares with the highest value will have a greater weight even if in fact less solid than others;
- Sustainability indices are indices that are spreading more and more, in which the weight of a stock is given by the values of CSR (Company Social Responsibility) or socio-environmental impact. These indices are often elaborated by the same companies that own higher indices, such as the Dow Jones Sustainability World Index;
Read also: Dow Jones
Stock Market Indices: Investing in CFD
Investing in indices and playing the stock market, as mentioned above, is a very wise choice: it is a stock with low volatility values and excellent diversification, particularly suitable for long-term investments precisely because of an overall trend to stability.
Moreover, thanks to online investment platforms (like eToro), it is possible to invest in CFDs.
These are derivative financial instruments, directly dependent on the underlying security, which make it possible to make all sorts of speculative investments on stock market indices.
These can be both short and long term, either by deciding to go long (buy) or short (sell short). This is a slightly different approach than value investing but allows you to generate profits in any market condition.
The best platforms to invest in stock market index CFDs are:
Invest in Stock Market Indices with Trade.com
Trade.com is a platform that has recently been gaining more and more notoriety, with all the credentials to compete for the podium with the main competitors.
The offers of Trade.com, in fact, are extremely advantageous:
- WebTrader platform, streamlined and efficient, which allows investors to offer investors a wide range of securities in which to invest, over 2100, from the main world markets;
- TradingCube, which allows you to view multiple stocks at the same time, so that you can effectively make forecasts and analyzes, especially on indices, by monitoring the most influential stocks;
- Wide range of trading indicators and advanced charts, to carry out technical analyzes capable of leading to winning forecasts on market trends;
- 5 different types of accounts, suitable for all portfolios and all needs, starting from the minimum for which a deposit of 100 euros is sufficient, up to the top of the range, with a deposit of 100,000 euros;
In general, it is a platform that can go a long way.
Seeing is believing: register on the platform and experience for yourself all the benefits it has to offer
Invest in Stock Market Indices with ForexTB
ForexTB is one of the sacred monsters of online investments: recognized by important companies, such as Juventus F.C., of which it is an official sponsor, and authorized by all the main European authorities.
The ForexTB offer is top of the range and is characterized by one of the best online investment guides ever published: it contains information that according to experts has an equivalent market value of over 3000 dollars.
It comes as no surprise to know that this guide, which can be downloaded for free in PDF once registration is complete, covers every aspect of online investments, from the first steps to professional tricks.
In addition to the online trading guide, ForexTB also provides users with some of the best trading signals.
They are processed by none other than Faunus Analytics, one of the most important financial analysis companies in the world. These are very useful ready-made analyzes on some of the most important titles of the moment that are communicated in real time via e-mail, SMS or chat.Sign up on ForexTB and try to invest with trading signals
On ForexTB, many other indices are available in addition to the NASDAQ, all of which are very profitable for market operations (for example, the AEX is present, but also the SMI).
Invest in Stock Market Indices with eToro
eToro is a relatively young platform: founded in 2015 by the Israeli company of the same name, it began operating in Europe with the authorization of CySEC and ESMA.
After a few years of uncertainty, in 2017 the platform definitely took off, establishing itself as a world leader in Social Trading.
Social Trading is a revolutionary tool, it can be said without any doubt. It provides users with a large community where they can exchange opinions, see resolved doubts or get tips for investing.
The real strength of Social Trading, however, lies in the Copy Trading function, i.e. the ability to copy in full the operations and investments made by the main experts who operate on the platform.
In this way it is possible to obtain profits similar to theirs and proportional to the amount of capital invested even if you do not have the necessary knowledge to realize them independently.
It goes without saying that this has allowed many novice investors to reap the first important satisfactions even in the initial stages of their journey.
Try Social Trading yourself and invest with eToro, you will see how advantageous it is to copy the trades of professionals
The major stock market indices
As mentioned, the stock market indices are summaries of a basket of equities that are represented by the index. For this reason, anyone with a particularly large equity portfolio could, in theory, synthesize their Index.
It is no coincidence that many of the most famous indices belong to rating companies, such as, for example, the S&P, belonging to Standard & Poor’s, a private American company which, despite owning numerous indices (S & P500, S & P100, etc.), is not listed directly on the stock exchange. .
The main stock market indices in the world are listed below:
CAC40: the French index
Cotation Assistée en Continu is the main French Stock Exchange Index and represents a measure based on the capitalization of the 40 most significant values among the 100 largest stocks by capitalization listed on the Paris Stock Exchange.
It is an Index composed of shares of French companies but with 45% of the investors being foreign, mainly private American entities. It includes some of the most renowned and important French companies in the world, such as AXA, BNP Paribas, Airbus, Credit Agricole, etc.
As you can see, this is not a selection by sector but with a territorial basis, so there are companies that do not compete with each other. This is at the same time one of the main strengths and weaknesses of the CAC40, which at the same time ensures high prices but which can make it difficult for intraday strategies.
DAX30: German index
The Deutsche AktienindeX 30 is a segment of the Frankfurt Stock Exchange, measured from the top 30 stocks by capitalization.
The discourse for the DAX30 is parallel to that for the CAC40 in terms of assessments and forecasts: they are companies selected on a territorial basis and belonging to the most disparate sectors, which do not compete directly with each other, but which make the analyzes particularly complex.
The two Indices are not comparable, however, as they are calculated on different bases.
FTSE100: Britain index
The Financial Times Stock Exchange is the British index calculated from the hundred companies listed on the LSE (London Stock Exchange) with the greatest capitalisation. The components of the index are established on a quarterly basis.
The threshold for accessing the FTSE100 is approximately £ 2.9 billion in capitalization and on average the top third of the ranking includes companies with a market capitalization of over £ 10 billion, with the top 5 exceeding £ 60 billion each. (Royal Dutch Shell, British Petroleum, HSBC Holdings, Vodafone, GlaxoSmithKline).
FTSE MiB: Italian index
The Financial Times Stock Exchange Milan stock exchange index, purchased in 2009 by the British FTSE index, is calculated starting from the 40 Italian companies with the largest capitalization, even if they have their registered offices abroad.
Considered among the best stock market indices in the world, the FTSE MiB can boast historical sessions of some importance, such as that of 13 October 2008 or 10 May 2010, which saw it close with a more than positive + 11.49% and + 11.28%.
The FTSE MiB is also made up of companies from the most disparate sectors, from Campari to Poste Italiane, up to Amplifon and Moncler.
Dow Jones: the oldest index
It is a price waighted index, based on the top 30 stocks on the American market. This has led it over time to gradually lose importance as it was considered unreliable to reflect the American stock market.
Lately the DOW JONES is taking advantage of the monetary policy of the Fed quickly regaining points, stabilizing above the level of 27,000 points.
NASDAQ 100: the index of technology stocks
The National Association of Securities Dealers Automated Quotation is the leading index for US technology stocks.
It is a value weighted index that takes into consideration the top 100 companies by capitalization, selected mainly in the technology sector. Financial companies are excluded and includes some foreign companies, factors that differentiate it from the S & P 500.
The Standard & Poor’s Index is a value weighted index that takes into account the top 500 companies by capitalization of the NYSE (New York Stock Exchange).
For years it has been the most significant index within the American market. The S & P500 has long since surpassed the DOW JONES and has also benefited enormously from the Fed’s monetary policy.
Nikkei 225: Japan index
Also a value weighted index, it takes into consideration the top 225 companies by capitalization listed on the TSE (Tokyo Stock Exchange). It is the main Japanese Stock Exchange Index and includes companies belonging to the most disparate sectors.
The ultra-expansionary yen policy inaugurated by the Abe government has led the Nikkei to reach new highs in the last period.
In conclusion, investing in stock market indices is an excellent alternative to the stock market. Especially if you are looking for a highly differentiated and low volatility stock.
Keep in mind, however, that stock market indices tend to collapse on the occasion of the distribution of dividends and the main periodic fiscal deadlines. Which is why it may be a wise move to go short for these occurrences.
At the same time, a long-term investment strategy cannot fail to take these occurrences into account in order to make appropriate corrections.
If you decide to invest online with the platforms that we have recommended, Trade.com, ForexTB and eToro, you will have no difficulty in taking advantage of the opportunities offered to you by the stock market indices.
An index represents a basket of securities and therefore represents its average performance.
We have the French CAC40, the German DAX30, the Britain FTSE100, the Italian FTSE MiB, the American Dow Jones, NASDAQ and S&P500 and the Japanese Nikkei 225.
Adding the capitalization of the companies included in the basket, the Dow Jones is currently the largest index in the world.
For the purposes of risk diversification, it is not only possible but also recommended to invest in indices. To do this, it is advisable to operate with free CFDs.