Stock Indices in World Markets
Stock indices are among the most complex financial instruments regarding how to trade. As a rule, only professional traders work with them. However, in some cases, a beginner can make money on the Index or use it for analytical purposes.
Today we will look at how to calculate the stock index and where it is applied in practice.
What Are Stock Indices
These are indicators of changes in value for a sample of securities. The listing consists of several stocks, which, in the opinion of managers, reflect the state of the entire market or its specific industry. This list of the Central Bank can be called a kind of portfolio of documents, which contains the products of the most efficient companies.
Tracking economic indicators on Exness.com, a trader receives a huge amount of information about the financial situation of a country or its industrial sector. In addition, he instantly assesses the investment attractiveness of a particular industry, after which he can make an informed decision about investments.
The index serves to provide data simply and conveniently. Experts summarize all the influence factors on the international market, making the final data available to the public. Even a quick analysis of the information received allows us to conclude the country’s state, its economic and general development.
Before deciding to buy any stock or bond, you should consider industry or country indicators. If their situation worsens yearly, investments are exposed to huge risks and imply insignificant profits. This is a perilous step for any investor, so focusing only on the most reliable and trusted companies is better.
It is worth remembering that exchange indicators are variable quantities and over time they can significantly change their values. If points began to fall at some point, this does not mean a complete collapse of the production sector. We must look deeper and consider the fundamental factors affecting the current situation.
Thus, it is not enough to study index values alone, but this information can become the basis for selecting the optimal set of securities.
How Stock Indices Are Calculated
Every trader knows that emotions and judgments have no place in Forex. Stock indices are designed to determine the present state of affairs. That is why they should not be affected by basket changes, additional issues or speculative transactions.
To avoid errors and miscalculations, the definition of stock indices is carried out according to specific formulas:
The most straightforward technique used to calculate the Dow Jones and Nikkei 225. To get the final result, you need to add up the price of all instruments of the “basket” and then divide the result by the number of corporations. The divisor can be adjusted depending on adding or excluding individual firms from the listing.
The scheme is traditional, but today it is rarely used in practice. Several indicators are calculated according to the method described above.
Free Market Capitalization Weighted
a more modern formula used by the NASDAQ, S&P 500, PTC, and others. It takes into account the value of the security and the number of shares in the free float.
To get the result, you need to multiply the price of an asset by its quantity on sale and divide by the derived number. The divisor is selected for each exchange indicator. Over time, it can change to maintain the accuracy of the calculations.
In addition to formulas, the analyst must consider the information base used in the calculations. Applied information is considered reliable only if it meets strict requirements:
- The characteristics of the selected securities describe all corporations in the industry
- The price of instruments is selected in proportion to their influence on the marketplace
- The sample size turned out to be large enough to assess the situation in a particular area objectively.
- Research is carried out objectively and honestly.
The world market is constantly changing, corporations appear and disappear, and securities quotes rise and fall almost every minute. In this regard, the recalculation of the Index should be carried out regularly, informing the public about changes in the global economy.
Major Stock Indices of the World
There are a considerable number of stock indicators in the world, but only a few of them are of decisive importance in fundamental analysis:
American Stock Indices
They are considered the most significant for the world economy because the US dollar is the most influential currency. Dow Jones Industrial Average refers to the industry and demonstrates success in this field. 30 securities from the most prominent American corporations take part in its calculation.
In addition to industrial enterprises, high-tech giants like Apple, Boeing, Microsoft and others are involved here. Thus, the Dow Jones reflects not only the development of business but the entire state of the American economy.
European Stock Indices
Less significant but can be used to determine the value of local companies or bonds. Among them, the most popular are
- The German DAX
- French CAC, and
- FTSE 100 from the London Stock Exchange.
How to Trade Indices on the International Platform?
In addition to its primary task, the Index can act as a full-fledged trading asset. Some of them already have futures contracts or options. Quotes of stock indices are determined depending on how the number of basis points has changed over a certain period. A trader can bet on an increase or decrease and then earn on the correct definition of directions.
The tool is top-rated on global markets because it provides reliable hedging of risks. The asset is a ready-made investment portfolio assembled from the industry’s best representatives. For example, RTS futures became the most popular trading instrument on the Moscow Exchange. In addition, S&P 500 contracts are regularly traded on American exchanges.
Recently, in addition to futures, ETF funds are gaining popularity.
They entirely copy the “index baskets,” due to which the movement of the fund quotes repeats the indicator’s value. If the listing situation changes, the ETF reviews its portfolio by adding or removing securities. This approach often brings benefits because the lists are compiled by professional analysts who take into account a lot of factors.
What Can Global Stock Indices Be Used For?
In addition to trading, the Index is widely used by traders in various situations:
Implementation of Bidding by Region
To assess the economic condition of enterprises in a particular territory, it is enough to look at the index values. If they gradually fall, then the activities of local corporations are inefficient. This situation indicates possible financial problems, difficulties in the production sector, or an underestimated level of sales.
For example, the FTSE100 is a barometer for the British economy. If a trader watches the outlook for Britain get worse, he can check his guesses against the updated FTSE100. Thus, the trader will receive reliable data and be able to continue the analytical study of the country.
Market Sentiment Estimation
Produced in cases where it is necessary to understand the mood of most participants and predict their subsequent actions. The information obtained will help to identify the number of bulls and bears and then make a prediction about the potential direction of the price.
It is worth considering that the mood of market traders is not always rational. It may not follow economic changes, but they have some connection. As a rule, the attitude is related to what proportion of investors are willing to risk money and invest in purchasing shares. Thus, the predominance of bulls can be recorded even in the event of stagnation of the national financial system.
Trade in Sectors
It has its characteristics, and if a trader decides to invest in a particular area, he should fully study it. First, you need to pay attention to the Index and its changes over a certain period. Depending on the proposed investment’s term, the person will determine which historical chart needs to be considered to obtain information.
In addition, one should have in-depth knowledge of the development of the industry. Tracking the successes and failures of individual industries, the trader will conclude the overall dynamics and find the optimal area for investment.