NEW TO INDICES TRADING?

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:

1. Dow Jones, Nasdaq and S&P (US)
2. DAX and CAC (Europe)
3. Hang Seng, Nikkei and ASX  (Asia-Pacific)

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.