A useful way to speculate on the world’s top financial markets, stock indices are weighted averages derived from the companies listed on the exchange, creating leveraged trading opportunities across the global equity markets.
Stock indices are weighted averages reflecting the collective value of publicly-traded companies from a market or industry sector. The change in value of an index represents the fluctuation of the company stocks that make the index. An index goes up in price if the overall value of the stock shares rises, and will go down in the event the overall value of those companies’ shares decline.
A stock index is a hugely important part of our financial world, but it is nothing more than a number representing the top shares from a particular exchange.
For example, the FTSE 100 represents the largest 100 companies traded on the London Stock Exchange. If, on average, the share price of these companies goes up – then the FTSE 100 will rise with them. And if they fall, it will drop.
Other examples of stock indices include:
Most of these are calculated using a capitalisation-weighted average, which means the size of each company is taken into account. The more a particular company is worth, the more its share price will affect the index as a whole.
However, the Dow Jones and Nikkei are price-weighted indices, where shares with higher prices have more influence. This means a stock trading at $100 is given 10 times more weight than one at $10.