Introduction to financial markets
What are indices?
Top stock indices like the DAX, S&P 500 and FTSE 100 are some of the most popular markets among traders.
What is a stock index?
A stock index is a financial market that tracks the performance of a collection of individual shares. As well as being one of the most popular asset classes to trade, they give an important insight into how a stock market is performing – so you’ll often see them quoted in the news.
The FTSE 100, for example, is an index of the biggest hundred companies listed on the London Stock Exchange. If those companies increase in value overall, the FTSE 100 will go up. If they decrease in value, the FTSE will drop too. This means a quick glance at the FTSE 100 can tell you how some of Britain’s biggest businesses are doing: which also offers an insight into the economy overall.
Different indices will track different groups of shares. For instance, the FTSE 100 aims to give an overall impression of the performance of the London Stock Exchange. Other indices might have a broader focus, such as entire region or continent – while some will only look at a specific sector or industry.
What makes indices popular
In recent years, index trading and investing has grown in popularity. Here’s why:
- Diversification. Rather than relying on a single stock, an index gives you exposure to a broad section of the market at once
- Lower volatility. Indices are usually less volatile than other asset classes, with their price movements smoothed out due to the number of assets they track
- Easy to research. Unforeseen factors can often cause major price action in stocks. This is less of an issue with indices, which are a broader reflection of the overall economy
What are the major indices?
There are hundreds of indices around the world, but some are far more widely traded and watched than others. Below is a list of some of the most popular indices – sometimes referred to as the ‘benchmark’ indices.
Some trading providers refer to these indices by their own names. We’ve included FOREX.com’s name for each market too.
Dow Jones (Wall Street)
The Dow Jones Industrial Average is one of the first stock market indices, created by Charles Dow in 1896. It follows the price of 30 ‘blue-chip’ companies on the New York Stock Exchange and NASDAQ. These companies include Apple, Intel, Exxon Mobil and Goldman Sachs.
The Dow is one of the most famous stock indices on the planet, but many traders consider it unreliable. Unlike its rivals, it doesn’t comprise the biggest companies in the US – instead, the Dow’s components are all handpicked.
S&P 500 (US SP 500)
The Standard & Poor’s (S&P) 500 is the most widely used measure of the US stock market. It tracks the prices of the biggest 500 companies listed on the New York Stock Exchange and the NASDAQ. It includes all of the companies listed on the Dow, plus 470 others.
Because the S&P 500 includes many more companies than the Dow, most investors consider it to be a more reliable metric for measuring the US stock market.
FTSE 100 (UK 100)
Launched in 1984, the FTSE tracks the prices of the biggest companies by market capitalisation 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.
The FTSE 100 is closely linked to economies throughout Europe through trade and geographical proximity, and therefore can be influenced by investor sentiment surrounding the large equity markets in Europe.
DAX (Germany 40)
Founded in 1988, 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 (inc. insurance), automotive, healthcare and chemicals sectors, with key components including Allianz, BMW, Bayer and Siemens. Its sheer size means that it is a dominant index in Europe and carries some influence over its neighbours.
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.
Euro Stoxx 50 (EU Stocks 50)
This index was created to follow the prices of the biggest 50 shares in the eurozone countries.
CAC (France 40)
The CAC tracks the largest 40 companies listed on the Paris bourse. It includes companies such as AXA, BNP Paribas and Total.
ASX (Australia 200)
The benchmark index for the Australian stock market is the ASX 200. It follows the prices of the 200 largest companies listed on the Australian Stock Exchange, ranked by market capitalisation.
Because Australia is a resource-based economy, global commodity demand can have a significant impact on this index. Demand from China is particularly important for Australia’s mining sector.
Test your knowledge
- A Shares
- B Commodities
- C Currencies
- A GB 100
- B England 50
- C UK 100
- A Berlin 50
- B Frankfurt 30
- C DAX