Indices measure the performance of a group of stocks. Rather than just focusing on the individual growth or performance of a singular company, indices allow you to gauge the overall health and strength of a market, and you will have heard them being frequently referred to in the media. You might have also heard them called stock indices, share indices, or simply the stock market.
Different indices track different groups of stocks. In the US, indices such as the Dow Jones, the NASDAQ, and the S&P 500 track the performance of the New York Stock Exchange and include essentially all the top companies that you can think of across various sectors including tech, banking, health, and much more. Other indices might have a broader focus, such as entire region or continent – while others only look at a specific sector or industry.
Here are some of the most popular indices:
- Wall Street (reflects Dow Jones): The 30 ‘blue-chip’ companies on the New York Stock Exchange, including Apple, Intel, Exxon Mobil and Goldman Sachs
- S&P 500 (US SP 500): the most widely used measure of the US stock market, the Standard and Poor’s (S&P) tracks the prices of the biggest 500 companies listed on the New York Stock Exchange and the NASDAQ. It includes all the companies listed on the Dow, plus 470 others
- FTSE 100 (UK 100) the FTSE tracks the prices of the biggest companies by market capitalization listed on the London Stock Exchange. The largest companies in the index are usually found in the mining, energy (particularly oil and gas) and financial services sectors
- DAX (Germany 40): the DAX follows the shares of the largest 40 companies listed on the Frankfurt Stock Exchange in Germany. The DAX index is dominated by the financial, automotive, healthcare and chemicals sectors, with key components including Allianz, BMW, Bayer and Siemens
- Nikkei 225 (Japan 225): This is the main stock market index for Japan, tracking the shares of 225 companies listed on the Tokyo Stock Exchange
How are indices calculated?
There are two different ways in which indices are calculated: either by market capitalization (more common) or by price-weight.
Market capitalisation indices
Market capitalization indices use the total market value of a company’s outstanding shares to assess how much it affects the index. This means that more valuable companies – also known as large caps - will have more of an influence on the index’s total value than a mid or small cap.
Price-weighted indices use a company’s share price to determine how much it can move an index. In other words, companies with higher share prices will have a greater influence on these indices.
To calculate the value of a price-weighted index, you add the share price of each stock together and divide by the total number of stocks in the index.
A company’s stock is generally classified as large cap (meaning it’s worth more than $10 billion), mid cap or small cap.