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Market Indices

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 market capitalization.

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 the market.

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 index.

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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"The ultimate measure of a man is not where he stands in moments of comfort, but were he stands at times of challenge and controversy." – Martin Luther King

 

 

 

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