ITIPress.org - Marlon Jerez /
Consultant in Economics and Financial Issues
Stock market indexes offer a useful form of conceptualizing the large
amount of information that is produced from the continuous purchase and
sale that occurs within the stock market. At the same time the use of
market indexes present new problems. First, there exist many different
indexes that compete against each other to attract attention. Second,
indexes differ in its construction and interpretation. There exist indexes
for a wide variety of instruments, but the indices for bonds, options,
futures and other instruments that are not securities are not very well
known or commonly followed.
Without a doubt, the most widely known index is the Dow Jones Industrial
Average. This index reflects the movements of the 30 largest industrial
companies that trade in the NYSE, like Exxon and IBM. The 30 industrial
companies that are included in the DJIA vary as the economy changes, but
it will always have the largest and most powerful industrial companies.
Each of the 30 companies selected have a similar importance in the index.
One of the most attractive characteristics of the DJIA Index is its ample
availability. Apart from being quoted extensively, it also appears
published on a daily basis in the Wall Street Journal. The base year of
this index is 1928. The index is calculated by adding the prices of all 30
stocks and dividing by the number of stocks (30).
Another index is the S&P 500 Index, which is more extensive than the DJIA.
It is comprised of 500 stocks. 400 industrial companies, 40 service
companies, 40 financial companies and 20 transportation companies. The
stocks included in the S&P 500 represent more than 80% of the market value
of all of the stocks in the stocks in NYSE, but also included are a few
companies within the Over the Counter Market (OTC). Another characteristic
of the index is the fact that each stock is weight according to the market
value of the shares in circulation. For example; General Motors receives a
weight of almost 4% of the index, while IBM receives 1/20 of 1%. This
reflects the fact that the market value of the shares of GM is about 80
times greater than that of IBM.
With the largest inclusion of companies and weighted market value, the S&P
500 Index makes for a better barometer of the activity within the stock
market to the great majority of experts.
Also, the S&P 500 Index is utilized as the standard by which the returns
on investors’ portfolios are compared to.
Another index, which is a little wider, is the NYSE Composite Index. Like
the S&P 500 Index, the NYSE Composite Index is an index that assigns
values, yet it differs due to its inclusion of all the stocks that are
registered in the New York Stock Exchange.
The NASDAQ Composite Index. This index is the mean of the prices of all
the stocks that are listed in the NASDAQ and are weighted based on its
In Japan the most well known index is the Nikkei, which is calculated
using a simple mean of the prices and then fixed by an adjusting factor,
which captures elements that may affect the price of the stocks. This
index is composed of 225 industrial stocks with the greatest presence in
In Germany the most known indices are the Dax and Commerzbank. The Dax is
formed of 30 stocks from the best quality companies that trade in the
Frankfurt Market. This index is weighted by taking into account the
percentage market capitalization of each stock. On the other and, the
Commerzbank Index is weighted by 60 of the most important stocks in the
Frankfurt Market; this index is wider, but the Dax is utilized more often.
In England there are a variety of indexes, but the most well known is the
Financial Times Stock Exchange (FTSE-100, Footsie). The Footsie is
composed of 100 stocks that have the largest capitalization in the market
form. This index is constructed by taking into account the prices weighted
based on the percentage capitalization of the stocks that make up the
The latin American markets also count on indices that reflect the action
of the stock market.
For example, in Argentina the principal index is the Merval, which
represents the market value (in pesos) of a portfolio of stocks that are
selected according to the participation in the quantity of transactions
and total that occurs in the Buenos Aires Stock Market. The date and value
are base is the 30th of June 1986 and it is equal to $0.01. The Merval
Index is calculated daily during the time transactions are processed. The
listing of stocks and weight are actualized quarterly and according to the
market participation of each during the past 6 months. All listed stocks
are considered in a decreasing manner according to their participation and
up to an accumulated amount of 80%.
In Mexico the Index of Prices and Listed Stocks which indicated the
development of the auction market. It is composed of a selection of stocks
that are weighted and come together to represent the stocks listed in the
Mexican Stock Market. Within the index a variety of companies from
different sectors of the Mexican economy are taken into account. Each of
the stocks that participate in the index’s calculation has a weight
relative to their market capitalization value.
In Chile the most widely used index is known as the IPSA (Price of Stocks
Selected Index), which is calculated by taking into account a group of
stocks that have the greatest participation.
In Brazil the principal indicator id the index called BOVESPA, which
reflects the development of the stocks within the Brazilian Stock market.
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