Wednesday, 6 July 2016

An Overview of Stock Market Indices

Stock market indices are a financial tool used throughout the World to measure how a group of companies' stocks have been valued. Indices also exist for commodities prices traded in exchanges such as the Chicago Mercantile Exchange. Stock market indices can generally be thought of as financial indicators. To better understand what stock market indices are, it is helpful to consider the different types of indices, why they are used and how they are measured. While some aspects of indices such as their calculation can be conceptual and abstract they can be thought of as simple financial tools.

The World's many Stock Market Indices:

Many countries have their own indices and many indices exist within many countries. The type of index varies according to what is being measured. While it is usually the stock of a group of companies, it can also include a collection of commodities such as oil, grains and metals. A few of the various types of indices are listed below.

-Local and Regional Indices Ex-Bloomberg Chicago Index
-National Indices Ex-Nasdaq-, DJI, S&P 500
-Commodities Indices Ex- S&P GSCI
-Sector Indices Ex- Nasdaq-100
-Specialised Indices Ex-Sin fund Index (corporations specialising in alcohol and tobacco)

Why Stock Market Indices are used:

Stock market indices have several functions. One of the major functions of an index is to provide a navigational direction regarding financial stock valuation of a particular group of companies. Other uses of indices include the following:

-In the sale of index futures
-To provide widespread performance data
-Recognition of corporate standards and achievement
-Analysis of business and economic trends.
-Research data for financial theorizing.
-Marketing and demonstration tool for financial services.

How Indices are calculated:

There are several ways to calculate in index value and how this is done is key to understanding what you are looking at when one sees an index number. For example, in a price weighted average index such as the Dow Jones industrial average, the prices of stocks are what influence the index value. However, in Nasdaq indices the traditional calculation method is market value weighted which is a calculation based on the value of outstanding shares. This metric takes into account both share volume and price. Several ways to calculate an index value are the following.

-Market value weighted average
-Equal weighted
-Price weighted average
-Market share weighted average
-Float adjusted weighted average

While the final index value will be different using all these methods the general trend will sometimes be the same whichever method is used. That is to say, even if the individual companies within the index are measured differently in terms of proportion of influence on the index value, the overall trends of those companies may be correlated and therefore reflected in the index. Nevertheless, the more representative and proportional the index measurements are, the more accurate a reflection of the company pool the index value will be.

In summary, stock market indices are financial measurement tools that reflect valuation of different groups of companies and/or commodities. Different indices exist around the world to provide financial planners and others useful indicators of how particular segments of an economy are performing at any given time and under various economic climates. The information from indices can be used in a plethora of ways such as for statistical analysis of data in economic research, portfolio management and financial services. Many indices are measured using weighted averages which provides for a more representational and proportional index value. However, there are several different ways to calculate a weighted average value using stock prices, outstanding shares, actively traded (float) shares and equal weighted.

Sources: n/us/page.topic/indices_500/2,3,2,2,0,0,0,0,0,0,0,0, 0,0,0,0.html .aspx res.html =biz-fin

By- A.W.Berry

Quote for the day

“I knew that if I failed I wouldn’t regret that, but I knew the one thing I might regret is not trying.” -Jeff Bezos